Provided by RBC Wealth Management and Thomas J. Powers

If you have a traditional IRA, your money can grow on a tax-deferred basis, but sooner or later you’ll have to start taking taxable withdrawals from your account. But what if you could make these withdrawals less “taxing,” while at the same time supporting a charitable group? Using a Charitable IRA rollover, you can do just that!

To begin with, the basic rule governing traditional IRA withdrawals is that you must start taking them once you reach age 70-1/2. Even if you don’t need the money to support your lifestyle, you have to take something, with the exact amount determined by your account balance and your life expectancy. And whatever amount you take is taxable.

Or, at least, it would be taxable if you took the money, even if you immediately invested it in another tax-advantaged vehicle. But there’s another possibility: If you’re at least 70-1/2, you can make a charitable IRA rollover

by transferring your withdrawals directly into a “public” charity, such as a college, hospital or religious organization. You can move up to $100,000 per year 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 only made permanent in late 2015, when President Obama signed it into law, retroactive to Jan. 1, 2015. So, now you can take advantage of this strategy year after year. And when you do, you’ll gain these benefits:

  • You’ll avoid taxes on your IRA withdrawals. If your required IRA withdrawals are large enough, they could potentially force you into a higher tax bracket during your retirement years. A charitable IRA rollover can possibly help you avoid this issue because you won’t have to pay taxes on your withdrawals.
  • You may be able to avoid cuts to Social Security benefits. Depending on your income, you might 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 increasing your taxable income, which, in turn, could help you prevent a decrease in your Social Security benefits.
  • You could 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 – sending it instead to a charity – can help you keep your AGI down, which may protect you from losing some itemized deductions.

Keep in mind, though, that this strategy is generally most appropriate for investors with traditional IRAs. If you have a Roth IRA, and you’ve had your account at least five years and don’t start taking withdrawals until you reach age 59-1/2, your 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; you can leave the account intact for virtually as long as you like.

Also, it’s important to note that this type of charitable rollover doesn’t apply to other retirement accounts, such as a 401(k) or similar employer-sponsored plan. However, you may be able to transfer assets from your 401(k) or other plan to your traditional IRA, and, from there, 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, give it some consideration. By helping to control your taxes and protect Social Security benefits and itemized deductions, while simultaneously contributing to a charity whose work you support, a charitable IRA rollover can pay off in more ways than one.                


This article is provided by RBC Wealth Management on behalf of Thomas J. Powers, 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