Tax-Free Transfers from Your IRA to Charity: A Smart Financial Strategy

At Yardley Wealth Management, we understand that many clients want to make a difference while also securing their financial future. If this resonates with you, there’s an effective way to achieve both goals. You can make tax-free transfers from your Individual Retirement Account (IRA) to support a charity while also benefiting yourself. This option is available for individuals aged 70½ or older, and it’s a smart move if you want to give back and receive steady income in return.

What Are Qualified Charitable Distributions (QCDs)?

For those over 70½, you might already be familiar with Qualified Charitable Distributions (QCDs). For years, QCDs have allowed people to donate directly from their IRAs without paying taxes on those distributions. Essentially, this strategy lets you support your favorite cause without increasing your taxable income. Moreover, it simplifies the process of giving.

What’s New for 2024?

However, there’s something new: Starting in 2024, you can make a one-time transfer of up to $53,000 from your IRA to establish a Charitable Remainder Trust (CRT) or a Charitable Gift Annuity (CGA). This approach allows you to receive income from the money you’ve donated, creating a win-win situation for you and your chosen charity. Plus, it offers additional flexibility in how you manage your charitable contributions.

How Do CRTs and CGAs Work?

Let’s explore what CRTs and CGAs involve:

• Charitable Remainder Trusts (CRTs): A CRT lets you put money into a trust that pays you (or someone you choose) income for life. After you or the other beneficiaries pass away, the remaining funds go to a charity you’ve selected. This means you can enjoy the income now while supporting a cause in the future.
• Charitable Gift Annuities (CGAs): With a CGA, you give money to a charity in exchange for a fixed annual income for life. Once your lifetime ends, the charity benefits from the remaining funds. It’s a simple way to secure a reliable income stream while supporting a cause you care about.

You can now fund these giving vehicles directly from your IRA without paying taxes on the transfer. Additionally, if you’re required to take a Required Minimum Distribution (RMD) from your IRA, this transfer can count toward that requirement, which is another added benefit.

Key Considerations Before Making a Move

Before you make a tax-free transfer from your IRA, there are a few key points to consider:

Why Simplicity Matters

The CRT or CGA must be funded exclusively with IRA money. Mixing in other assets can complicate the tax benefits, so it’s best to keep it straightforward. Furthermore, keeping it simple helps ensure that you maximize the potential benefits.

Understanding Recipient Restrictions

Only you and your spouse can receive the income from the CRT or CGA. This income isn’t transferable to anyone else, ensuring it’s used as intended. This restriction is important to note when planning your estate and financial future.

CRTs vs. CGAs: Which Is Better?

Due to the $53,000 limit, CRTs might seem less attractive because of the costs of setting up the Trust and ongoing management. For most people, a CGA will be the more practical and cost-effective choice. However, it’s worth discussing both options with a financial advisor to determine which best suits your goals.

Considering Tax Implications

Any income you receive from the CRT or CGA will be taxed as ordinary income. Therefore, it’s important to plan accordingly. Additionally, understanding the tax implications will help you avoid any unexpected surprises.

Aligning with Your Goals

If you’re motivated by leaving a legacy and securing income, this strategy could be ideal for you. If your primary goal is generating income in retirement, maybe these vehicles aren’t for you. Aligning your financial strategies with your long-term goals ensures that your decisions are both effective and fulfilling.

Maximizing Your Charitable Giving

At Yardley Wealth Management, we’re here to help you make the most of your money, whether you want to grow it, protect it, or give it away. If you’re over 70½ and seeking a way to support causes you care about while also benefiting yourself, consider this tax-free transfer strategy. It’s a straightforward yet powerful way to do good while securing your financial future. Plus, it offers peace of mind knowing that your contributions are making a positive impact.

Ready to Explore Your Options?

If this sounds like something you’d like to explore, don’t hesitate to reach out. Michael J. Garry, Esquire, CFP®, MBA, Founder & CEO, and Accredited Investment Fiduciary® at Yardley Wealth Management, is ready to guide you through the process. With years of experience and a deep commitment to helping our clients, Michael can assist you in making the most of this opportunity and ensuring your charitable giving is impactful and tax-efficient.