Individual retirement accounts (IRAs) comprised over an estimated $13.9 trillion of assets as of 2021 per the Investment Company Institute. IRA balances have risen significantly over time as companies moved away from pension plans and baby boomers gathered assets for retirement. However, IRAs can also be used for charitable purposes in addition to supporting a person’s lifestyle. This article will review two approaches to using some or all of your traditional IRA assets to support charities of your choice: (1) Making gifts at death and (2) Qualified charitable distributions during your lifetime.

Making Gifts at Death

Designating one or more charities as the beneficiary for some or all the assets of your traditional IRA can be a great way to achieve a high level of tax efficiency and still support causes near to your heart. The Wall Street Journal referred to this approach as an “income tax trifecta.”* Dollars are contributed to IRAs before taxes, the assets grow tax-free, and there are no income taxes at death if the assets are left to a charity. What’s not to like?!

Using this approach, your heirs will not need to pay income taxes on that portion of the inherited IRA designated to a charity. Assets in your estate outside of the IRA also receive a step-up in cost basis to current market value upon your death which can reduce capital gains taxes when these assets are sold in the future. So, if you are inclined to make a charitable bequest, the use of IRA assets will be more tax-efficient.

For very large estates, estate taxes could be lowered through a charitable bequest from an IRA. The individual estate tax exemption per person is $12.92 million for 2023.

You also increase the flexibility of your estate planning should you want to change the charities or family members that will benefit from your IRA upon your death. It is much easier, and often less expensive, to change the beneficiaries for an IRA than it is to modify a will or a trust.

You can also direct IRA donations at death to a donor-advised fund, such as those offered by many investment companies and community foundations. The IRA owner can designate family members to recommend grants which can further enhance the personal meaning of this charitable legacy.

* “Win an Income-Tax Trifecta with Charitable Donations” by Laura Saunders, Wall Street Journal, September 2, 2022.

Qualified Charitable Distributions (QCDs) During Your Lifetime

Qualified charitable distributions (QCDs) from IRA accounts have been possible since 2006. With a QCD, a person over age 70½ can designate up to $100,000 per year of withdrawals from an IRA be paid to one or more qualified charities. These distributions are not taxed to the IRA owner but also cannot be used as an itemized deduction. QCDs can have several benefits.

QCDs count toward your required minimum distribution (RMD). Beginning in 2023, an individual does not need to begin taking RMDs until they reach age 73.

By using a QCD to cover some or all of the RMD amount, a person can reduce their adjusted gross income (AGI) for tax purposes. This reduction may keep a person from moving into a higher tax bracket. A lower AGI may also reduce the alternative minimum tax (AMT), Medicare premiums and the portion of your Social Security payments that are taxable.

An individual can increase the amount given to a charity by using pre-tax dollars. For example, if you make a $20,000 QCD payment directly to a charity and you are in the 24% tax bracket, you may save $4,800 of taxes. If the individual had the withdrawal payable to themselves first, the net amount available for the charity would be only $15,200 ($20,000 – $4,800).

You do not need to “itemize” on your tax return to make a QCD. For certain taxpayers, this may allow them to benefit their charities while still using the standard deduction amounts that are $13,850 for individual taxpayers and $27,700 for married filing jointly taxpayers for 2023.

The IRS limits itemized charitable deductions to 60% of a taxpayer’s AGI. QCDs may be a way to work around this limitation.

Doing Well While Doing Good

You have worked hard to save dollars for retirement. You have taken care of your family. You have planned to leave a legacy with charities that are important to you. Let’s use the tax code to maximize the impact of your charitable giving while still benefitting your family. You will be doing well while doing good. What’s not to like?