Trusted Advisor: Charitable Gifting

Gary Pollock

Wealth Manager, First Republic Investment Management

If you’re over 70 1/2, and required to take distributions from your IRA, you have a unique opportunity: to direct part of your Required Minimum Distribution (RMD) to your favorite public charity without the distribution being classed as taxable income. What is the advantage of donating directly from your IRA? The primary benefit is avoiding income tax on the RMD. But there are some other, less obvious benefits. You may wish to discuss this strategy with your accountant if you fall into any of the following categories:

  • If you are subject to Alternative Minimum Tax and can’t take advantage of all of your itemized deductions.
  • If you have already made donations totaling 50% of your gross income.
  • If your RMD will boost your income such that the taxation on your Social Security increases.

Each individual may gift up to $100,000 from their IRA, even if the donation is greater than the RMD amount, as long as a few simple rules are followed:

  • You must be 701/2 or older on the date of the distribution to the charity. (Note that this is different from the RMD requirement to simply take the distribution in the year in which you turn 701/2.)
  • The gift must be paid directly to the charity. Note, some custodians will send the check directly while others will make the check out to the charity but send it to you for you to forward. In any case, be sure that the distribution isn’t made out to you or it will be classed as taxable income.
  • The charity cannot be a charitable remainder trust, private foundation, or donor-advised fund.
  • The maximum that you can donate is $100,000. Your spouse can also give up to $100,000 if she or he is older than 701/2 and has an IRA.
  • The rules apply to IRAs only and do not include other tax-deferred accounts such as a SEP, 401k, or 403(b).
  • Because this type of donation reduces your ordinary income, it cannot also be claimed as a charitable deduction.

Since there is some extra information required (name and address of the charity) to process this type of RMD, be sure to plan ahead. If you want to be certain that your request is completed properly, be sure to get the ball rolling no later than November since many custodians cannot guarantee requests submitted in December.

The views of the authors of these articles do not necessarily represent the views of First Republic Bank.