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Smart donation strategy for retirees

posted Oct 5, 2016, 7:04 PM by Tim Isbell   [ updated Jul 20, 2017, 2:12 PM ]
Do you know that people above age 70.5 can directly transfer up to $100,000 from a traditional, tax-deferred retirement account to charity every year, have it count against their Required Minimum Distribution (RMD) for that year, and not have to pay taxes on the money they contributed?

Here's why this makes sense: A typical retiree pays her bills using money from defined benefit retirement programs, withdrawals from tax-deferred retirement accounts (IRA, 401k, 403b), dividends and capital gains from investments in the taxable accounts, and Social Security. All these sources are subject to some taxation. Whether she needs the money or not, every year from when she turns 70.5 she must withdraw at least the RMD from her tax-deferred retirement accounts and pay ordinary income tax on every dollar withdrawn.  

So, suppose she wants to donate $6,000 to her church for the year. If she draws money from any of the above sources and writes a check to the church, that money adds to her adjusted gross income and gets taxed. But if she arranges to donate the $6,000 directly from her tax-deferred retirement account to the charity, it counts against her RMD for the year and does not add to her adjusted gross income. This works whether she itemizes or not, though if she itemizes she can't also claim a deduction. For retirees with sufficient money to pay all their bills and also contribute to charity, the first dollars to donate are RMD dollars going directly from your account to the charity.

I just did this myself, and all it took was a phone call to Vanguard, who holds my Traditional IRA.

For more on this, including the details of how to make the transfer directly from your retirement account, check out this Kiplinger article.

For more strategic ways to donate money, check out Tax-smart Donations.There you'll find tips on donating appreciated stock, creating a donor advised fund, and others. Also, click on Retirement Funding for tips on how to plan for retirement. 


Blessings, Tim


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