IRA Direct Charitable Contributions

Many taxpayers have unexpectedly large Individual Retirement Accounts (IRAs), some in seven figures. Many individuals have more than sufficient funds to retire comfortably and do not need all of the money in their IRA accounts.

Historically, the tax law acted as a disincentive for donating IRA assets to your church or charity—the money in traditional IRAs was subject to ordinary income tax upon withdrawal. Then, if the individual wished to use some of the funds to make a charitable contribution, the tax on the IRA withdrawal was offset in varying degrees by a charitable deduction for the gift. Consequently, very few individuals have donated IRA funds to a church or other charity during their lifetime.

IRA giving opportunities. Thanks to tax law provisions made permanent in 2016, taxpayers age 70½ or older can make tax-free distributions directly to a church or charity from traditional IRAs or a Roth IRA up to $100,000 per year. (IRA direct charitable contributions to donor advised funds, supporting organizations, private foundations or charitable remainder trusts do not qualify.)

Under these new rules, taxpayers can transfer IRA funds from an IRA custodian to your church or charity without incurring income tax on the transfer. The donor may claim a charitable deduction only to the extent that the IRA was funded with after-tax dollars. Individuals may have made both pre-tax and after-tax contributions to a traditional IRA. Roth IRAs are funded with after-tax contributions.

The benefit to your church or charity. Your church or charity could significantly benefit from IRA charitable distributions legislation because the provisions may encourage a significant amount of new contributions from generous donors who will do not have to pay tax on a charitable gift of IRA funds up to the $100,000.

Just think of the ways that IRA direct charitable contributions could be used for your capital campaign, pay off debt, or provided resources for expanded ministries!

How does an IRA direct charitable contribution work?  One of your donors, Mr. Smith, age 70½, has accumulated about $1 million in his traditional (or Roth) IRA. He believes he will need about $800,000 of these funds for his retirement. He had planned to leave his IRA intact for another 10 years rather than pay the tax on withdrawal of assets as required under the old law.

For example, Mr. Smith can transfer $100,000 to your church or charity. The $100,000 withdrawn from his IRA will not be subject to income tax. His gifts will be tax-deductible only to the extent that he had previously funded his IRA with after-tax dollars.

Click here for Sample IRA Qualified Charitable Distribution Gift Acknowledgment.


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.