Charitable Giving, You May Be Doing It Wrong

Caleb Frankart

February 8, 2021

If you are required to take annual IRA withdrawals, and are also making charitable donations, listen up. You may be doing it wrong.

At age 72, the IRS requires that you begin to take annual withdrawals from your retirement accounts (Roth IRAs excluded). This is referred to as the Required Minimum Distribution, or RMD. The rationale is that taxes have been deferred on these funds and their earnings for years as you save. But sooner or later, it’s time to pay the piper. Withdrawals mean taxes must be paid, which is why a lot of folks only take their RMD. Tax code changes over the last few years have also limited deductibility for charitable giving in most cases. In light of the increase in the standard deduction (a good thing for most), many who used to itemize are no longer doing so.

Let’s say you are a law abiding, tax paying citizen, and charitably inclined? Wouldn’t you like to have your cake and eat it too? Here’s a very simple but practical example:

Jim is a good guy. His RMD for the year is $5,000, and his effective tax rate is 10%. Jim also gives $5,000 to his church every year. In addition, he doesn’t have enough deductions to itemize on his tax return.

Here’s how this typically goes down.

  1. Jim withdrawals from his IRA ($5,000).
  2. Jim writes a check to church for $5,000 or writes checks throughout the year totaling $5,000.
  3. Jim files his income tax return and pays $500 while taking no deductions for his giving.
  4. Jim is essentially paying the IRS $500 to facilitate a transaction.

Instead of pulling the funds out of his IRA and settling up with Uncle Sam, Jim could instead send the $5,000 directly to his church from his IRA (a check made payable to the organization). From a tax standpoint, he has satisfied his obligation to the IRS without paying taxes and satisfied his charitable obligations. He’s got an extra $500 to boot.

This is called a Qualified Charitable Distribution (QCD). These QCDs are not taxable up to $100,000 each year. That’s per individual, so if you are married and both spouses have IRAs, you could hypothetically give up to $200,000 without paying taxes. That’s certainly not typical, but you get the idea. If you are like Jim, you may be leaving money on the table. Money you could use to buy a boombox, or an iPad, or buy shares of GameStop!*

*(Disclaimer: This is not a recommendation to buy Game Stop stock)