A Less-Taxing Option

Charitable IRA rollover pays off in more ways than one

With a traditional IRA, your money can grow on a tax-deferred basis (exciting!), but sooner or later you’ll have to start taking taxable withdrawals from your account (less exciting). But what if these withdrawals were less “taxing” and supported your favorite charitable group? By electing to use a charitable IRA rollover, you can do just that.

The basic rule governing traditional IRA withdrawals is that you must start taking them once you reach age 70-½ . Even if you don’t need the money, you must still take something, the exact amount determined by your account balance and life expectancy. And the amount you take—whatever that may be—is taxable.

Or, at least, it would be taxable if you took the money and you immediately invested it in another tax-advantaged vehicle. The less “taxing” option says this: If you’re at least 70-½, you can make a charitable IRA rollover by transferring your withdrawals directly into a “public” charity, such as a university, hospital or religious organization. Up to $100,000 per year can be moved this way, and you can divide your contributions among as many charities as you like.

The charitable IRA rollover has been around for several years, but it was made permanent in late 2015, when President Obama signed it into law. These are the benefits of it:

  • Avoid taxes on IRA withdrawals. If your required IRA withdrawals are large enough, they could potentially force you into a higher tax bracket. A charitable IRA rollover can help you avoid this because you won’t have to pay taxes on those withdrawals.
  • Help avoid cuts to Social Security benefits. Depending on income, you may have to pay federal income taxes on your Social Security benefits. By taking advantage of a charitable IRA rollover, however, you may be able to avoid an increase on your taxable income, which, in turn, could help prevent a decrease in your Social Security benefits.
  • May protect some itemized deductions. If your adjusted gross income (AGI) exceeds certain levels, you may have to reduce the amount of itemized deductions you can claim on your tax return. So, as is the case with Social Security benefits, the income you don’t accept from IRA withdrawals—that is, sending it instead to a charity—can help you keep your AGI down, which may protect you from losing some itemized deductions.

Keep this in mind: This strategy is generally most appropriate for investors with traditional IRAs. If you’ve had a Roth IRA for at least five years and don’t start taking withdrawals until you reach age 59-½, those withdrawals are free of federal taxes and the issue of taxable distributions doesn’t apply. Additionally, you’re never required to take withdrawals from a Roth IRA; the account can be left intact for virtually as long as you like.

Also, this type of charitable rollover doesn’t apply to other retirement accounts such as a 401(k) or similar employer-sponsored plan. However, it may be possible to transfer assets from the 401(k) or other plan to your traditional IRA and then, from there, to make the charitable IRA rollover.

You’ll want to consult with your tax advisor before moving any of your IRA withdrawals to a charity. But if such an action is appropriate for your situation, consider it. By contributing to a charity whose work you support for the reasons outlined above, a charitable IRA rollover will likely pay off in more ways than one.

This article is provided by RBC Wealth Management on behalf of Gary Kiemele, a Financial Advisor at RBC Wealth Management, and may not be exclusive to this publication. The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.