In recent years, IRA owners 70 1/2 and older have been able to contribute up to $100,000 a year from their IRA directly to charity. These qualified charitable distributions (QCDs) count towards required minimum distributions but they generate no taxable income. You won’t get a tax deduction for a QCD but several quirks in the tax code make them a good deal if you have an IRA as well as charitable intentions.
As of now, QCDs are not permitted in 2010. However, there is a bill in Congress that would extend several expired tax breaks, including QCDs. Considering that this is an election year, that bill has a good chance to pass.
Here’s a strategy to consider. Decide how much you’d like to contribute to charity this year and make a donation from your IRA. Then convert the balance to a Roth IRA. If you have a $100,000 traditional IRA and you intend to donate $5,000 to charity, for example, you could donate $5,000 from your IRA and convert $95,000 to a Roth IRA.
If Congress restores the QCD tax break for 2010, you will have:
* Satisfied your required distribution for the year;
* Avoided income tax on your $5,000 IRA distribution;
* Contributed $5,000 to your favorite charity; and
* Maximized your Roth IRA conversion.
It Congress doesn’t restore the QCD tax break, you will have a $5,000 taxable distribution (your required distribution) and a $5,000 charitable deduction, which may offset the income tax on your distribution. And you’ll also have your Roth IRA, for fully tax-free distributions after five years and after age 59 1/2.