This post is adapted and used with permission from Crescendo Interactive, Inc., © 2020.
If you’re like most people who receive annual income from an IRA, you’re likely paying more and more in taxes each year. The good news is that rolling over part or all your annual Required Minimum Distribution (RMD) to a nonprofit like JEWISHcolorado can help reduce your tax bill and provide support to the causes you care about. This strategy is referred to as an “IRA charitable rollover.”
How the Required Minimum Distribution (RMD) Works
- Once IRA owners reach age 72, they must take a withdrawal from their IRA each year. This is known as the required minimum distribution (RMD). The RMD requires the IRA owner to withdraw a certain amount based on the owner’s age and the balance of the IRA.
- The RMD from a traditional IRA is subject to income tax. The RMD can push some IRA owners into a higher tax bracket.
- If the IRA owner does not take the RMD, they will face stiff penalties.
Alternatives to the RMD
There is a great alternative to taking the RMD: the IRA charitable rollover, which is a gift made from an IRA directly to a nonprofit. The IRA charitable rollover allows IRA owners to support JEWISHcolorado using pre-tax assets. In addition, the amount of the IRA rollover gift may count against the IRA owner’s RMD. With a rollover gift, the distribution to charity is not subject to tax. That’s a tax-smart way to give.
Double the Benefit
The law allows an individual to transfer up to $100,000 per year to qualified nonprofits as rollover gifts. If you are married, you and your spouse can each give $100,000 per year if you both own an IRA. If you file taxes jointly, a double gift to our organization can go a long way toward reducing your taxes and making a difference in the work we do.
What If You Have a 401(k) or Other Retirement Account?
The IRA rollover only applies to IRAs. If you have a 401(k) or other retirement account that requires minimum distributions, you cannot make an IRA rollover gift. However, if the idea of benefiting from the IRA charitable rollover appeals to you, it is often possible to roll over funds from your other accounts into an IRA and then make a rollover gift. Talk with your advisor about whether this option makes sense for you.
How Would an IRA Rollover Gift Work?
Saul loves our mission and wants to support us in a tax-smart way. He’s saved all his life, and his IRA and, in turn, his RMD have grown quite large. Saul has sufficient income from other sources and does not need the full amount of his RMD to support his lifestyle. Here is how the IRA rollover benefits Saul.
Saul must take an RMD based on his age and the amount in his IRA:
Without the IRA Rollover
With the IRA Rollover
|Saul withdraws his $160,000 RMD.||Saul contacts his IRA custodian, directing the custodian to distribute $100,000 to our organization. He takes a distribution for the remaining $60,000 of his RMD.|
|Saul must pay considerable income tax. The distribution of his RMD pushes him into the highest federal and state income tax bracket.||Saul pays tax only on the $60,000 of the RMD that he received. This will not push him into a higher tax bracket.|
|Saul pays taxes and is disappointed that he has less disposable income to give to charity.||Saul can give more to charity than he thought possible—all because he made an IRA rollover gift.|