IRA distributions to Charity

Submitted by Brian Smith on Wed, 2016-11-16 22:58

Hi:

There was a recent article about having RMD’s go direclty to a charity. It went on to say, that if you can itemize then you should take the withdrawal from your IRA and then donate to a charity.

All things being equal, if you are in a 15% tax bracket as an example and can itemize…what’s the advantage it taking a withdrawal from IRA and donating to charity vs. having RMD go directly to charity?

Thank you,



Submitted by David Mertz on Wed, 2016-11-16 23:38

I find it hard to imagine a scenario where someone age 70½ or older would benefit from the higher AGI that results from taking a distribution and subsequently making a charitable contribution rather than making a Qualified Charitable Distribution.  I can think of a number of reasons that it could be worse, such as increasing taxable Social Security benefits or increasing Medicare Part B cost.  If you can provide a link to the article, I would be interested in reading it.

Submitted by Brian Smith on Thu, 2016-11-17 21:46

Here’s the article that mentioned taking the withdrawal from the IRA and then donating to a charity. I believe it is around the 4th paragraph.   Thank you for reviewing and appreciate your feedback. http://time.com/money/4528803/give-charity-ira-account/

Submitted by David Mertz on Thu, 2016-11-17 23:59

You are probably referring to the paragraph that reads “If you itemize, however, this may not be the best strategy for you — because if you make a tax-free transfer from your IRA to a charity, you cannot also deduct that money as a charitable contribution. If that’s your goal, take the withdrawal yourself and then make the donation.”  That statement doesn’t make any sense.  You are not permitted to deduct it, and there is no need to deduct it, because the amount that is QCD doesn’t appear in your income to begin with.  Adding it to AGI just so that you can subtract it back out with an itemized deduction does nothing but increase AGI.  As I said, I can’t imagine any scenario where it would be beneficial for someone who qualifies to make a QCD to increase their AGI just for the sake of being able to show a higher amount of charitable contributions on Schedule A.

Submitted by Alan - IRA critic on Fri, 2016-11-18 00:01

With short articles like that, condensed paragraphs tend to omit needed details. I think the point they were trying to make is that if you can otherwise itemize deductions (actually you need to have other deductions at least equal your standard deduction), then itemizing will provide you with MOST of the benefit and certainly far more than neither itemizing or doing a QCD. But it will almost always fall short of doing the QCD and eliminating the entire amount from your AGI as well as from your taxable income.  

Submitted by David Mertz on Fri, 2016-11-18 00:33

  • Also note that even if the charitable contribution is made by direct transfer and qualifies to be reported as a QCD, you are not *required* to report it as a QCD.  It gives you the *option* to report it as a QCD or as an itemized deduction.  You can even split the reporting between reporting as a QCD and reporting on Schedule A.  One of the requirements for being a QCD is that it is otherwise deductible on Schedule A.  You can make the decision when you prepare your tax return.  Nothing in the reporting to the IRS by the IRA custodian distinguishes a distribution that qualifies as a QCD from a regular distribution; it’s reported as a regular distribution.
  • One thing not mentioned in the article is that a QCD can only come from the pre-tax portion of your IRA.  If you have basis in nondeductible contributions in your traditional IRAs and your distribution transferred to charity exceeds the amount of pre-tax funds in your traditional IRAs, the portion of a distribution transferred to charity that exceeds your pre-tax funds (in other words, comes from basis) can only be reported as an itemized deduction on Schedule A.

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