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Using RMD to Make a Charitable Distribution from Your IRA

GIVE written on blocks

  |  By Taylor Close

For the first time this year, IRA owners looking to satisfy their required minimum distribution by making a tax-free donation to charity will not have to worry that Congress will not recognize these donations.

Lawmakers established qualified charitable distributions (QCDs), which are also referred to as IRA charitable rollovers, in 2006. A qualified charitable distribution allows IRA owners and beneficiaries who are 70½ or older to directly transfer up to $100,000 in IRA assets to an eligible charity without having to include the withdrawal as taxable income.

But Congress typically extended the qualified charitable distribution provision only one or two years at a time -- often retroactively and at the last minute. This made it difficult for investors to confidently use IRA funds to make charitable donations. For instance, the QCD provision expired at the end of 2013, but Congress acted on Dec. 23, 2014 to extend the tax break retroactively for all of 2014. This gave IRA owners just eight days to make a qualified charitable distribution.

However, in a welcomed move, last year lawmakers voted to make qualified charitable distributions permanent, allowing investors to confidently donate to charity using their IRA.

Using a required minimum distribution to make a QCD

While talk of required minimum distributions (RMDs) and qualified charitable distributions (QCDs) can be confusing, an RMD is the minimum amount a traditional IRA owner must withdraw from their account each year starting at age 70½.

QCDs can be a convenient way for an IRA owner who must take an RMD to support charitable causes and receive a tax break. To qualify for tax-free treatment, IRA holders need to donate the money to an eligible charity[1] and instruct their IRA custodian to transfer the funds directly from the IRA to the charity.

The benefit of taking a qualified charitable distributions from an IRA is that the distribution comes out of the IRA without the tax consequences that would otherwise apply to a withdrawal, meaning it is excluded from income. In addition, the QCD can satisfy an IRA owner’s RMD, even though the QCD is not taxable the same way an RMD is taxable.  Keep in mind though, if you donate to a charity using a QCD, the payment is not deductible as a charitable contribution.

When deciding if an IRA charitable rollover makes sense for you, it is best to consult with a tax or financial advisor who can help you weigh the pros and cons of a QCD as well as ensure you understand the logistics involved.

The IRS deadline to make a 2016 qualified charitable distribution with your PENSCO IRA is 12/31/16.

Here is what you need to do:

Fill out the following form: IRA Distribution Request Form (or the Beneficiary Distribution Request Form if you are making the request with an inherited IRA and as the beneficiary you are over the age of 70 ½.)

PENSCO would like to receive your request by 12/20/16 to process submissions in time; the IRS will not allow any extensions. You can submit the form and letter of instruction to PENSCO in two ways:

  1. Upload online
  2. Fax: 303-614-7096

If you have questions on qualified charitable distributions or required minimum distributions, please call us at 1-800-962-4238.

[1] A charitable organization described in section 170(b)(1)(A) (other than any organization described in section 509(a)(3) or any fund or account described in section 4966(d)(2)

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.