Transcript
Today’s question comes from Sam in Suntree. A coworker says he makes charitable donations from his retirement account and none of it is taxed. That’s a good deal. How do I do that? Well, Sam, I love that you’re asking about this. The fall is the busiest season for charitable gifts and tax-free giving of what’s normally taxable income. That’s a good way to go. Now, your coworker probably means he’s making donations from an IRA account and not your company retirement plan. Direct donations to charities are called Qualified Charitable Distributions, and they’re permitted only from IRA accounts. There are a few requirements to make those donations completely tax free. Number one is you have to be 70 and a half years old at the time of the donation. Now, if these donations are coming out of the 401(k), your friend’s not recognizing the income and he’s reporting it wrong. He should report the income and then the donation amount on Schedule A, Itemized Deductions on his tax return. For most people, this would not result in a fully offsetting deduction because some or all of that gift ends up being absorbed by the standard deduction.
But Sam, if you’re at least 70 and a half years old and you don’t have an IRA, you’re still able to make these donations with a few maneuvers. First, you could transfer retirement accounts from a former employer to an IRA or if allowed by your current plan, you could perform something called an in-service distribution and transfer some or all of your active 401(k) to an IRA account. Check your summary plan description to see if that’s possible. Now, once funds are in an IRA, there’s a few hoops to jump through to get the tax break that we talked about. We cover those in the post on our website titled How Do I Make Charitable Donations From My 401(k)? As always, if you have any questions, contact us. I’d love to hear from you.
How do I make charitable donations from my 401(k)?
Direct donations from a 401(k) to charity on a tax-favored basis are not possible. However, direct donations to charities from IRAs, called Qualified Charitable Distributions, are permitted. There are a few requirements to make those donations completely tax-free, chief among them is that you must be 70½ years old at the time of the donation.
If you want to make a QCD but do not have an IRA, you will first need to get money into an IRA. The most common methods are to transfer retirement accounts from a former employer to an IRA or, if allowed by your current plan, perform an in-service distribution and transfer some of your active 401(k) funds to an IRA account. Your plan’s Summary Plan Description will say if in-service distributions are permitted.
Once funds are in an IRA, there are a few requirements to get the tax break:
- You can donate to as many charities as you like, as often as you like, up to a total of $100,000 per taxpayer, per year. With planning, a couple can donate up to $200,000 in a tax year.
- The checks must be made payable to the charities.
- The charities must be 501(c)3 public charities.
- You must be at least 70½ years old at the time of the donation.
- If you have made deductible contributions to the IRA since turning 70½, those contributions will cause the donations to be taxed until all of those post 70½ contributions have come out of the account.
Facilitating a QCD is fairly simple: request a distribution form from the provider holding your IRA. Most IRA providers will give you the option to have the check mailed to the charity or to you, so that you can present the check in a more personal manner. Remember, regardless of where the check is mailed, the check should be made payable to the charity, not to you.
Alternatively, many IRA providers will provide a checkbook on the IRA for QCD purposes. Just make sure the charity cashes the check before December 31, so the donation is properly included on the 1099-R the provider will issue.