After years of contributing to tax-deferred 401(k)s and IRAs, income tax is due on that money when you take withdrawals in retirement. Annual withdrawals from traditional retirement accounts are required after age 70 1/2, and the penalty for skipping a required minimum distribution is 50 percent of the amount that should have been withdrawn. However, if you are in the fortunate position of not needing your distribution for living expenses and are charitably inclined, you can avoid income tax on your required withdrawal by donating your money directly to a qualifying charity.
Here’s how a qualified charitable distribution from your IRA can be used to help others and reduce your tax bill.
— Meet the QCD requirements.
— Satisfy required minimum distributions.
— Calculate your QCD tax break.
— Set up a direct transfer to a charity.
— Select a qualifying charity.
Meet the QCD Requirements
IRA owners must be age 70 1/2 or older to make a tax-free charitable contribution. Those who meet the age requirement can transfer up to $100,000 per year directly from an IRA to a charity without paying income the tax. If you file a jointly, your spouse can also make a charitable contribution of up to $100,000, couples can exclude up to $200,000 if they donate it to charity. A charity must be a 501(c)(3) organization in order to receive tax-free IRA charitable contributions. For more information, contact your financial advisor or Mark Cox at the Boys and Girls Club of Flagstaff.