I've often heard that taxpayers should make their charitable contributions from their IRAs rather than from their other savings, but didn't understand why until recently. It seemed to me that any tax incurred by withdrawing funds from the IRA would be offset by the charitable deduction available for making the gift. So the result would be the same whether the taxpayer withdrew the funds from the IRA and subsequently made a charitable gift of the same amount or made the donation directly from the IRA.
What I forgot is that not everybody itemizes and if you don't itemize you can't take advantage of the charitable deduction. This is most relevant for seniors who are less likely to have mortgage payments and, therefore, are less likely to itemize.
So, if you are over 70 1/2, don't itemize, make charitable contributions and have an IRA or Roth IRA, you probably are better off making your charitable gifts directly from the IRA or Roth. Here are the ground rules to take advantage of this option to do a charitable rollover as authorized pursuant to the PATH Act of 2015:
- You have to be over 70 1/2.
- The contribution must come from an IRA or Roth IRA, not from a 401(k), simple IRA or 403(b) plan.
- The contribution must be to a public charity, including churches and foundations, not to a donor advised fund.
- You cannot receive the IRA distribution yourself; it has to go directly to the charity.
- You are limited to $100,000 a year.
If you want to take advantage of this option, contact your IRA sponsor and the charity you want to receive the distribution to coordinate the rollover.Of course, the higher your tax bracket, the more useful this will be. And if you're fortunate enough to not need your required minimum distributions for your living expenses, this can help you avoid being forced to pay taxes on funds you'd prefer to leave in your retirement plan.