If you have money in an Individual Retirement Account (IRA), you know you can’t take out distributions without paying taxes on the money you withdraw. For many older people with large portions of their personal wealth tied up in IRAs and other tax-advantaged retirement accounts, the tax implications of taking money out of an IRA can impede their ability to give large sums to the charity of their choice.
If you want to give money to a charity you support, taking the cash out of your IRA and paying the taxes on it could eat up a big chunk of the gift you were hoping to give. While you can take an itemized deduction for charitable contributions, the deduction has to exceed the standard deduction before it actually becomes useful for you to claim the money donated. Not only that, but charitable contributions are only deductible up to a portion of your income depending upon the type of charity you support and the type of property or assets donated. This means you could end up having to pay a lot more in taxes than you get back in deductions if you take money out of your IRA prematurely to make a gift to charity.
Fortunately, lawmakers have addressed this problem in the past and made it possible for Americans to exercise their generous spirit, with an “IRA charitable rollover, described below. Lawmakers are also working on a way to make it possible for IRA holders to once again give money to a charity without having to pay a big bill to Uncle Sam in return for their generosity.