It’s permanent at last! The PATH Act of 2015 permanently extends the IRS provision that allows individuals who are at least 70 1/2 to make tax-free distributions to qualified charities from their IRA.
In case you don’t already know, if you have an individual retirement account (IRA) and are 70 ½ years and older in 2016, you are required to take an annual withdrawal from your IRA. This compulsory yearly distribution is called your “required minimum distribution” or “RMD”.
The PATH Act of 2015 allows an individual to make a yearly charitable contribution from an IRA of up to $100,000 without paying income taxes on the distribution. Donations must be made to one or more qualified charitable organizations or private foundations; the funds cannot be contributed to a donor-advised fund or a supporting organization.
The process for making the donation is simple. The transfer must be made directly from the IRA sponsor to the charity or charities of your choice on or before December 31 of each calendar year.
As an example, if you plan on giving $10,000 to a charity by writing a check and you have assets in an IRA, consider making the charitable donation from your IRA instead and spend the $10,000 from your regular account on daily living expenses.
The tradeoff is that you lose your charitable deduction on the $10,000 contribution, but normally the charitable deduction is far less then the tax that you would pay on the IRA distribution, and the cost savings of not having to pay income taxes on your RMD can add up quickly.
High net worth individuals who want to make a permanent charitable contribution may want to consider more sophisticated charitable giving such as creating a charitable remainder trust.
At Strategic Wealth Planning, we are always available to answer any questions you may have relating to charitable giving or your personal financial blue print. Please call our office at 214-727-6000 to set up a confidential meeting with our CEO, Stephen Blum.