What is an IRA?
Individual Retirement Accounts (IRAs) are a way to make tax-efficient investments to ensure financial security when you retire. There are two common types of IRAs — traditional and Roth IRAs.
Contributions to a traditional IRA can be fully or partially tax deductible depending on your filing status, your income, and whether or not you or your spouse are covered by an employer’s retirement plan. Funds in a traditional IRA are not typically taxed until they are withdrawn.
Qualified distributions from a Roth IRA are tax free. Contributions can be made as long as the account holder has earned income and amounts can be left untouched for life; there is no required distribution on Roth IRAs. Contributions to a Roth IRA are not tax deductible.
Following the Secure Act in 2020, there is no age limit on making contributions to traditional or Roth IRAs, as long as the contributor (or, in some cases a spouse) has earned income. They can be set up with a:
- Bank or other financial institution
- Life insurance company
- Mutual fund company
- Stockbroker or financial advisor
Types of IRA
In addition to traditional and Roth IRAs there are other types of retirement arrangements that present unique possibilities for long-term financial health:
- Payroll Deduction IRA. Under this aptly named IRA, employees set up either a traditional or Roth IRA through their employer and authorize a payroll deduction amount. The employer’s sole responsibility is to transmit the designated funding, but they do not contribute any additional money.
- Simplified Employee Pension (SEP). This method allows employers to set aside tax deductible funds for both their own retirement accounts as well as their employees. Employees are immediately vested, though they are unable to contribute any of their own funds to the account.
- Savings Incentive Match Plan for Employees (SIMPLE IRA). Both employers and their employees can contribute funds to a SIMPLE IRA. This type of plan does not come with the same start-up and operating costs of other IRAs. It can be utilized by any small business, generally with fewer than 100 employees.
- Salary Reduction Simplified Employee Pension Plan (SARSEP). The IRS defines SARSEP as any simplified employee pension plan set up before 1997 that includes a salary reduction agreement. Eligible employees can elect to have a portion of their salary redirected to their IRA, which comes with a tax advantage. SARSEPs set up before 1997 must maintain fewer than 25 employees; and at least half of the eligible employees must choose to make salary reduction contributions.
- 401(k). While technically not an IRA, 401(k)s receive similar tax treatment to an IRA, and can also offer a Roth component that receives similar tax treatment to a Roth IRA. A 401(k) is a retirement savings vehicle sponsored by an employer. Employees can contribute via payroll deduction, and many employers offer matching contributions as well. While employee contributions are always owned by the employee, some employers have a vesting schedule for their contributions. Both traditional and Roth 401(k)s can be eligible to be rolled over into an IRA or Roth IRA when the employee separates from employment, or in some cases, upon age 59 ½ even if still working for the sponsoring employer.
How to donate an IRA to charity
You might be wondering: Can you gift an IRA before death? Let’s review several ways to set up an IRA distribution to charity during your lifetime and as part of estate planning.
Charitable donations from an IRA during your lifetime can be made via an IRA Charitable Rollover, which can also be called a Qualified Charitable Distribution, or QCD. Congress passed this retirement arrangement in 2015, allowing taxpayers 70.5 years old and up to distribute cash from their IRA accounts directly to charitable organizations without having to recognize it as income. It does, however, fulfill required minimum distribution standards. It is important to note that a DAF cannot be the charitable recipient of a QCD, and in 2024, the QCD limitation is $105,000 per person.
Testamentary planning options can be explained in the following three ways:
- Name a charity or donor-advised fund (DAF) as beneficiary
This is the most straightforward option. It only requires you to list a charity on a Beneficiary Designation Form, subsequently removing retirement assets from an estate. It also allows you to use retirement assets for testamentary gifts, and your heirs to avoid Income In Respect of a Decedent (IRD) Tax. To keep heirs involved, choose a donor-advised fund (DAF).
- Name a charitable remainder trust (CRT) as beneficiary for a spouse or child
An estate tax deduction is equal to the value of the remainder interest. With this method, income is streamed to an individual without being subject to IRD tax. If a spouse is the only income beneficiary then they will qualify for the unlimited marital gift tax deduction.
- Fund an immediate charitable gift annuity (CGA) for the benefit of an heir
A charity promises to make payments for life at a payout rate based on CGA rates in effect at the donor’s death. This IRA will simply pass to charity if the annuitant dies before the donor. In that case, the IRD tax is imposed on the charity, not the estate or annuitant.
FAQs
What is a required minimum distribution (RMD)?
RMD is the minimum amount that individuals must withdraw each year from their IRA once they reach a certain age. It is intended to ensure that taxation of retirement savings is not indefinitely deferred.
What is a qualified charitable distribution (QCD)?
A QCD is the act of transferring funds — a maximum of $105,000 per person in 2024 — from an IRA to an eligible charity. For anyone subject to required minimum distributions, this counts towards their requirement despite not being subject to income taxes.
What are the differences between donating from an IRA while alive vs. after death?
Charitable donations from an IRA can be made during your lifetime via an IRA Charitable Rollover (QCD) and are not subject to income tax. IRA donations made as part of an estate plan can go directly to a charitable organization, without passing through probate, following the death of the account holder.
What are the tax benefits of a charitable distribution from an IRA?
The biggest benefit of making a charitable distribution from an IRA is that the donation gets to the charity without counting toward the IRA owner’s taxable income.
What charities are eligible to receive an IRA QCD?
Either a tax consultant or the charity itself will be able to shed light on eligibility, which is based on its tax exempt status — the charity must be 501(c)3 organization and eligible to receive tax-deductible contributions.
What are the new QCD rules for 2024?
For 2024,the QCD limitation has increased to $105,000 per person. You can also use up to $53,000 of a QCD to make a one-time donation to a charitable remainder txfrust (CRT) or Charitable Gift Annuity (CGA).
How can I set up an IRA QCD?
Get in touch with your financial advisor or IRA custodian for the forms required to send money to the eligible charitable organization(s) of your choice. You must meet the 70.5-year-old age requirement and follow proper procedures.
