If you enjoy donating to charity and are required to take withdrawals (RMDs) from your traditional IRA, you might be able to save on taxes by using a strategy known as a Qualified Charitable Distribution (QCD).
Here’s How it Works:
You can donate money directly from your IRA to a charity that the IRS recognizes, which can help reduce your taxes. If you're 70½ or older, you can give up to $105,000 from your IRA to charity in 2024 ($210,000 for married couples). This donation will count toward the required amount you must withdraw (RMD), but it won’t increase your taxable income or your tax bill.
Why Does this Matter?
When you take money from your traditional IRA, you usually have to pay income taxes, which can go up to 37% in 2024, plus possible state taxes. But if you donate through a QCD, you avoid those taxes.
Other benefits:
You might qualify for other tax breaks. For example, a lower taxable income means you can deduct more of your medical expenses.
You might avoid having to pay taxes on your Social Security benefits or additional taxes on your investment income.
You might dodge higher Medicare premiums that kick in when your income goes above a certain amount.
A few things to remember:
You won’t get an extra tax deduction for the donation since you’re not including it in your income.
Although you need to start taking RMDs from your IRA at age 73, you can start making QCDs at 70½.
If you want to use this strategy for 2024, make sure the donation is made directly from your IRA to the charity by December 31, 2024. You can use QCDs to cover all or part of your required withdrawals. For example, if you need to withdraw $20,000 in 2024 and you donate $10,000 through a QCD, you’d only need to withdraw another $10,000 to meet your RMD requirement.
There are just the basic rules and restrictions to avoid taxable IRA withdrawals through charity donations. If you're considering this option, check with your financial advisor before acting to ensure this option is best for you.