10 Jan RMD from your IRA, Roll with it!
This is a little bit of alphabet soup for you in the new year, but good news nonetheless. First, let’s just say that there are some nice benefits to being over 70, especially if you are philanthropically inclined and prefer not to take your required minimum distribution (RMD) on your individual retirement account (IRA).
Through a direct IRA Charitable Rollover, clever philanthropists who designate some or all of their annual required IRA distribution – up to $100,000 – to charity can reduce their tax liability. At the Southwest Florida Community Foundation, the money can be earmarked to specific nonprofit agencies as designated funds, or used to establish scholarship funds, field-of-interest funds that support your passions or “causes.” By transferring money directly from your IRA to a charity, you don’t have to claim it as income and you get to put it to good use in a fund that you can name after yourself, your family or someone you wish to honor. Here’s an example of why an IRA Charitable Rollover might be right for you.
The donation counts as your required minimum distribution but doesn’t increase your adjusted gross income.
Your first RMD must be taken by April 1 of the year after you turn 70½. Subsequent RMDs must be taken by December 31 of each year. If you don’t take your RMD, you’ll have to pay a penalty of 50% of the RMD amount.
- One generous donor, upon turning 70½, was required to withdraw $75,000 annually from his IRA.
- By donating directly to a tax-exempt 501(c)(3) nonprofit, he didn’t have to claim the money as income.
- By giving through a community foundation, no matter what cause he wanted to give to, he could endow it so that the charity didn’t get a large lump sum all at once.
- In this case, the donor wanted to support the community foundation’s fund for the Environment which was already established, and also create a scholarship fund in his wife’s name.
- Based on his annual income, he decreased his tax liability from $133,666 to $92,450, for a savings of $41,150.
- Retirement assets such as a 401(k), 403(b), etc. can also be donated directly to charity but must first be rolled into an IRA.
There are two exclusions for direct IRA Charitable Rollovers:
- They can’t be used to establish a donor-advised fund (though this is currently being reviewed by Congress); and
- The donor can’t claim the charitable donation on his or her income tax return.
The community foundation, tax planners and financial advisors can help donors determine if an IRA rollover is a good solution for their giving. IRA holders are required to make annual withdrawals upon turning 70½, which, depending on their gross annual income can bump up their tax brackets two levels.
These IRA donors only receive maximum tax advantages through a direct contribution from their IRA. Also, in certain tax brackets, reducing adjusted gross income has additional advantages like lowering Medicare premiums. Donors can also leave their full IRA or a percentage of it to a favorite charity or the community foundation in their estate planning.
Charitable contributions through an IRA rollover to the community foundation can be made in a lump sum or distributed throughout the year to multiple charities. Here’s one man’s story:
Robert’s Rollover Supports Community Challenges
When Robert launched his own consulting firm nearly 40 years ago, he also started planning for retirement, opening a traditional IRA and contributing what he could during the lean early years. As his profit margins increased, Robert contributed the maximum amount annually.
Now nearly 71, he is financially secure, has solid investments and his IRA has grown substantially. Robert knew when he turned 70½ he would be required to withdraw minimal annual distributions from the IRA and pay income taxes on those funds. His financial advisor suggested he consider donating directly to charity.
“This was exactly the answer I was looking for,” Robert says. “I’ve been involved with the community foundation for years and realized I could use the IRA money to support its great work in the community.”
We showed Robert how an IRA Charitable Rollover provides tax-free withdrawals while supporting his philanthropic passions. Robert’s charitable contribution counts toward the minimum distribution (up to $100,000 annually).
Robert can use the IRA Charitable Rollover as a single donation to the community foundation or allocate funds throughout the year to help the organization respond to changing and immediate needs. Through this year’s donation, he made a sizeable allocation to the Hurricane Irma relief fund and to one of the foundation’s initiatives to transform the workforce in Southwest Florida.
You can be like Robert too. If you would like more information on supporting the organizations or causes that you care about, talk with your financial advisors and if it is a solution for you, contact me at 239-274-5900 or at [email protected]. We can establish a fund in a matter of a few minutes.
For more tax and philanthropic strategies, download our 4 Smart Ways to Maximize your Philanthropy and Tax Benefits at https://floridacommunity.com/4-smart-ways
The Southwest Florida Community Foundation, founded in 1976, cultivates regional change for the common good through collective leadership, social innovation and philanthropy to address the evolving community needs in Lee, Collier, Charlotte, Hendry and Glades counties. The Foundation partners with individuals, families and corporations who have created more than 400 philanthropic funds. Thanks to them, the Foundation invested $5.4 million in grants and programs to the community. With assets of $115 million, it has provided more than $71 million in grants and scholarships to the communities it serves since inception. The Foundation is the backbone organization for the regional FutureMakers Coalition and Lee County’s Sustainability Plan. Currently, the Southwest Florida Community Foundation’s regional headquarters are located off College Parkway in South Fort Myers, with satellite offices located on Sanibel Island, in LaBelle (Hendry County) and downtown Fort Myers. For more information, call 239-274-5900 or visit www.floridacommunity.com.