Using an IRA to make charitable contributions

Normally, money distributed from an Individual Retirement Account (IRA) is taxable. However, if the funds are donated directly to charity, the distribution is completely tax-free. This is a significant tax-planning opportunity for older taxpayers. To qualify for tax-free treatment, a charitable IRA distribution must meet three criteria:

• You must be at least 70½.
• Your IRA administrator must send the distribution directly to a qualified church or charity.
• The funds must be distributed from a traditional IRA or Roth IRA. SEP IRA, SIMPLE IRA, 401(k), and 403(b) plans don’t count for this special rule.

You don’t get an itemized deduction for this charitable gift. Instead, the amount of the charitable IRA distribution is not included in your income for the year, but counts as your required minimum distribution. This helps keep your income (and adjusted gross income) lower than if you took the money out yourself and subsequently donated the same amount to charity.

Keeping your income low can help you avoid higher Medicare premiums, because the cost of Medicare insurance increases once your adjusted gross income for the year goes over $85,000 ($170,000 for married couples).