How Can American Family Employees Access the Benefits of Charitable Giving with an IRA?

An Individual Retirement Account (IRA) provides a tax-advantaged way to save money over the years and secure a steady income stream during retirement. However, did you know that there are two additional strategies you can employ to maximize your charitable impact while minimizing taxes? By utilizing Qualified Charitable Distributions (QCDs) and naming charitable beneficiaries, you can make a significant difference in the causes you care about while optimizing your financial situation.

Give to Charity during Retirement Years through a QCD After Retired From American Family:

When you reach the age of 73, the IRS mandates that you take annual income withdrawals, known as Required Minimum Distributions (RMDs), from your IRA. Failing to meet this requirement can result in penalties. However, there are circumstances in which retirement-age individuals and couples may prefer not to take an RMD. For instance, they may have sufficient alternative sources of income for certain years or want to avoid being pushed into a higher tax bracket, which can adversely affect Social Security payments and Medicare benefits.

Fortunately, individuals and couples aged 70½ and older have a tax-smart strategy called a qualified charitable distribution (QCD) at their disposal. A QCD allows you to instruct your IRA administrator to send up to $100,000 per year—either the entire RMD or a portion thereof—to one or more operating charities. For married couples filing jointly, each partner can make annual QCDs of up to $100,000, potentially totaling $200,000. Furthermore, recent legislation, such as the SECURE Act 2.0, enables individuals to direct a one-time QCD of $50,000 to a charitable remainder trust or charitable gift annuity, starting in 2023. Moreover, QCDs will be indexed for inflation beginning in 2024, allowing for even greater impact over time.

The beauty of QCDs is that the IRA assets are directly transferred to the charity, and as a donor, you don't report QCDs as taxable income or owe any taxes on them, even if you don't itemize deductions. In fact, QCDs may offer more substantial tax savings compared to cash donations, which require claiming charitable tax deductions. By reducing your adjusted gross income (AGI), as illustrated in the case study below, QCDs can have a positive impact on various key calculations. For example, a lower AGI can determine the taxable portion of your Social Security benefits or affect your eligibility for deductions and credits.

Let's examine a case study to demonstrate how a QCD enhances tax savings:

Case Study: Enhancing Tax Savings with a QCD Gift Bob, a 75-year-old retiree in 2023, needs to take an RMD from his traditional IRA, valued at $1,050,000. Based on the account balance, his projected RMD is $42,683. Bob's ordinary income for 2023 is $80,000, and he files his tax returns with the single filing status.

Option 1: If Bob takes his RMD income of $42,683, his AGI will increase to $122,683. Assuming he has no other deductions to itemize, he would take an itemized deduction of $42,683, resulting in $80,000 in federal taxable income.

Option 2: Alternatively, if Bob instructs his IRA administrator to send his RMD as a QCD to an eligible charity, the RMD would be excluded from his taxable income. Bob can then take the standard deduction for 2023, which amounts to $13,850, and an additional standard deduction of $1,850 as he is over 65 and filing as single. Therefore, his total standard deduction is $15,700, reducing his federal taxable income to $64,300.

This hypothetical example demonstrates that a QCD can lower taxable income by $15,700.

Give Beyond Your Lifetime by Naming Charitable Beneficiaries After Retired From American Family:

It's important to note that not all assets are treated equally when passed on to heirs. Traditional IRAs, in particular, have a unique tax feature wherein heirs are required to pay income taxes on the inherited assets based on their individual income tax rate at the time of withdrawal.

This unique tax aspect makes public charities, including donor-advised funds, ideal beneficiaries of IRA assets. Unlike individuals, public charities do not pay income tax on IRA income, ensuring that every penny of your donation can be directed toward supporting your charitable goals.

Moreover, you can consult your advisors about using IRA assets to fund gifts such as charitable remainder trusts, which provide income to your heirs. Charitable remainder trusts offer various benefits, including providing a steady stream of income for your heirs, enabling your estate to claim an estate tax deduction if needed, and allowing you to create a charitable legacy by naming a donor-advised fund or other public charity as the beneficiary of the trust assets.

Featured Video

Articles you may find interesting:

Naming a charitable beneficiary is a straightforward process that can result in substantial tax savings for your heirs and estate.

Summary of Ways to Give to Charity through Your IRA and Retirement Accounts

You have the power to name a donor-advised fund or other public charity as a charitable beneficiary on all IRA, 401(k), and 403(b) plans. Additionally, you can make QCDs from a traditional, inherited, inactive SEP, or inactive SIMPLE IRA plan. These strategies empower you to make a lasting impact on the causes you care about while optimizing your tax situation.

To learn more about the benefits of a Schwab Charitable donor-advised fund account, plan your charitable legacy, or explore options like charitable remainder trusts, charitable lead trusts, and charitable gift annuities, Schwab CharitableTM offers a wealth of tools, information, and resources online. It's essential to consult with your financial, tax, and legal advisors and reach out to Schwab Charitable to discuss your giving intentions.

By employing these effective strategies, retirees including the American Family professionals can make the most of your IRA, leave a lasting charitable legacy, and enjoy the satisfaction of supporting causes that make a significant difference in the world.