With the new tax reform law in place, the ability of your donors age 70.5 and older to donate the distribution from their Individual Retirement Accounts (IRAs) to charity has been made permanent. This is good news. Previously the provision was tenuous and had to be renewed every year. Let me explain.
Required Minimum Distribution (RMD)
The donor’s required minimum distribution is the minimum amount that he or she must withdraw from their account each year. The IRA holder generally must start taking withdrawals from their IRA, SEP IRA, SIMPLE IRA, or retirement plan account when age 70.5 is reached. However, Roth IRAs do not require withdrawals until after the death of the owner. The IRS has a very nice page with these details.
Your 70.5 and older donors who have IRA’s are obligated to take a “required minimum distribution” each year. When they receive those funds, it’s a taxable event for them. To avoid paying that tax they can donate the distribution in part or in whole to your nonprofit.
Qualified Charitable Distribution (QCD)
Be sure to let your donors know the following:
- The distribution must be sent from the financial institution that has held the IRA directly to the charity. If the check or wire transfer goes to the donor, it does not count.
- Any qualified charitable organization counts, with the exception of donor-advised funds, supporting organizations, private foundations, or split-interest charitable trusts.
- The distribution will not be included in the taxpayer’s income, and it is not deductible on the taxpayer’s income tax return.
- The QCD will count toward the IRA owner’s required minimum distribution from his or her IRA or, alternatively, the donor can have up to $100,000 of the RMD transferred to charity.
- The distribution is limited to $100,000 per year; husband and wife are treated separately.
- Owners of inherited IRAs also qualify if they are over 70½.
- IRA distributions add to a taxpayer’s gross income.
- Higher income for retirees can disadvantage them in several ways, from causing higher taxation of Social Security benefits to reducing the deductibility of Schedule A deductions. Therefore, giving to charity can avoid those problems.
- For retirees who cannot itemize, this law indirectly allows them to make a charitable deduction.
- To the extent that an IRA owner makes charitable deductions, and so long as it is administratively feasible, charitable contributions should come from the IRA.
- No gifts may be exchanged in return for donating the IRA distribution. That would invalidate the donation.
- The donor will be allowed to take the standard deduction and also the charitable deduction.
Let Your Donors Know ASAP
Since competition for donor giving is intense at year-end, it’s best if you get an early message out to your donors age 70.5 and older sooner rather than later. Your letters should be followed by a phone call to talk over the details with them. If you don’t know the age of your donors, you can email me for how to fix that problem.
Share A Calculator
Lastly, your letter and email to your targeted donors, should share this Kiplinger calculator link so that your donors can easily compute their mandatory minimum distributions from a traditional IRA, which starts when you hit age 70 1/2. To use the calculator, donors need only input their age at the end of 2018 and the total balance of their traditional IRA accounts as of December 31, 2017. Balances from Roth IRAs should not be included as they do not have a required minimum distribution.
By focusing on donors age 70.5 and older, you will boost your year-end giving.
Please feel free to use the content of this post without attribution with your donors.
I welcome your questions and the opportunity to learn from your experience. Please contact me.