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Giving Options for IRA Qualified Charitable Distributions

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Written By: Jennifer Perry, CAP®, M.B.A., Interim Managing Director, Regional Team, ACF of Sedona

As a philanthropic advisor, I spend most of my time helping individuals develop impactful ways to support causes they care about.

This can involve helping them find charities in line with their interests. It also involves working with individuals and their financial team to identify which assets to donate to charity and the appropriate charitable tools to achieve their goals.

As we approach the end of the year, many people aged 72 and above must make large taxable withdrawals or Required Minimum Distributions from their IRAs. A smart way to help offset the tax implications of an RMD is to make a Qualified Charitable Distribution directly from your IRA to charity. Because the donation goes directly from the IRA to your preferred charity (or charities) and is never received by you, it is not counted as taxable income.

I recently read an article by Russell James, J.D., Ph.D, CFP®, Professor of Charitable Financial Planning at Texas Tech University, titled DAF alternatives for IRA QCD gifts. After reading it, I knew many could benefit from learning about these advanced ways of making long-lasting, impactful charitable gifts using the IRA QCD option.

It is common for people to make a direct payment out of their IRA to one or more specific charities of choice. This is fairly simple when the dollar value is low, but donors aged 70.5 and above can make gifts up to $100,000 a year that will offset their RMD. As the amount of money increases, the process of selecting the benefitting charity can be a more difficult decision. This is when it is a good idea to meet with a philanthropic advisor to help discuss options.

An important nuance is that IRA QCDs cannot be put into a donor advised fund; however, they can be used to establish a charitable fund with their local community foundation. This enables your QCD to benefit charities for years to come; a gift that keeps on giving! Here are three examples of how those charitable funds can work with IRA QCDs:

  1. Field of Interest Funds. These are funds held at a community foundation that are restricted to a set of criteria determined by the donor and grants are distributed through a competitive grant application process. Recently we worked with a retired engineer who is passionate about STEM education. This donor established the Prescott Area STEM Education Fund from their IRA QCD. They avoided the income tax on the distribution and now are investing in STEM education annually through their partnership with ACF. This is a good choice for donors who want their grantmaking to remain relevant over the long term. The annual request for grant applications ensures that new and emerging organizations and programs can be funded. Donors can establish their own specific field of interest fund or contribute to an existing one.
  2. Designated Funds. These are funds held at a community foundation that are restricted to making annual grants to one or more specified charities. The donor selects the specific organizations they want to support. They can be local, national or international. The donor determines what percentage each charity will receive annually. The donor names the fund and the money is endowed in perpetuity or for a number of years. The community foundation then makes the annual disbursements for the donor. This is a good choice for donors who are loyal to specific organizations and want to continue to support them. It can be a very impactful gift for the designated organizations because the donor essentially endows their annual gift to the organization(s).
  3. Scholarship Funds. Scholarship funds are another great option for your IRA QCD. For many, the gift of education has led to the donor’s personal success. You can create a new scholarship and select the region students are from, the school in which they will attend, or even simply give to an existing scholarship fund. The possibilities are infinite. The Arizona Community Foundation is the largest private provider of scholarships in the state. Last year we awarded just under $5 million to 1,800 students.

In all three examples, the donor determines the criteria for how the money will be granted when the fund is set up and then relinquishes grantmaking control to the community foundation. This is what enables the donors to receive the charitable deduction and avoid income tax on the IRA withdrawal.

Here in Sedona and the Verde Valley, we have 15 field of interest funds to benefit our community. Areas of focus include housing, career and technical educational scholarships, arts and culture, the environment, and community improvement to name a few.

If you are interested in discussing your charitable giving goals and ways you can take advantage of some of these advanced tools for your philanthropy, please give me a call at 928.399.7218.

Disclaimer - This information is for educational purposes only and should not be considered either legal or financial advice. Please see your own professional advisors for information that applies specifically to your circumstances.