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The primary purpose of an IRA for most investors is to provide cash flow once they’re no longer working.  Funds withdrawn from your traditional IRA are generally subject to federal and state ordinary income tax. The taxation is similar to when you earn money from a job, with the exception that no Social Security or Medicare tax is due on IRA withdrawals.

If you have an interest in giving to charities, current tax laws offer little tax benefit for donations, as more than 90% of taxpayers use the standard deduction, according to the IRS. Many taxpayers still haven’t adjusted to the new normal, in which charitable giving offers few tax benefits.

David Gardner For the Camera
David GardnerFor the Camera

Lawmakers may have taketh away when it comes to the tax advantages of giving, but they have given us some tools to use IRAs to fund charitable giving during your lifetime and as a legacy. If you’re philanthropically minded, consider these strategies.

Qualified charitable distributions. Once you turn age 70 1/2, you gain a special power when it comes to your IRA. You’re able to designate some of your IRA withdrawals to go directly to charity. It ends up being even better than a deduction, as unlike most IRA distributions, funds going directly to charity are not included in your taxable income.

Another plus is that once you turn 72, the IRS requires that you take a minimum distribution every year from your IRA based on your age and the balance of your account. While many will exceed the minimum withdrawal as they need those funds for spending, others are forced to withdraw and pay taxes on IRA distributions that they don’t need. Qualified charitable distributions can satisfy all or part of this requirement.

Charitable bequests. Not only are IRAs useful for charitable giving during your lifetime, but they also have strong advantages for philanthropy when you’re no longer around. While many end up handling charitable bequests in your will or trust, doing this through IRA beneficiaries ends up being a superior option for many.

When you leave IRAs directly to your children or other family members, they turn into inherited IRAs. As they withdraw from their inherited IRAs, they will need to pay taxes on those funds. By leaving funds to charity, no one pays income tax — including the charity. Moreover, if you change your philanthropic goals during your lifetime, you can update them simply by submitting a form to the custodian rather than spending the time and money to update a will or a trust.

Charitable remainder trust. The Secure Act largely did away with stretch IRAs, which allowed inheritors to extend IRA withdrawals over their lifetimes. This was a blow to the plans of many savers who hoped to use IRAs to pass their wealth on to the next generation. Now most beneficiaries have 10 years to pull out funds from their inherited IRAs. The charitable remainder trust has emerged as a method to both benefit charity but also slow down IRA withdrawals.

The CRT allows you to sidestep the 10-year rules and space out withdrawals over the lifetime of the inheritor or a fixed period of up to 20 years. It’s called a charitable remainder trust because after a percentage of the account is paid to your heirs annually for the duration of the trust, what’s left over goes to charity. In setting up the trust, the donor can identify specific charities or use a more flexible charitable fund.

Some donors fear leaving a large IRA directly to beneficiaries, as they can withdraw the entire balance immediately in spite of disastrous tax consequences. With a CRT, you can control the pace of withdrawals by putting in place a trustee that will follow your wishes. Some CRT proponents also cite creditor and divorce protection as advantages for the heir. Because the CRT assets are held apart from the beneficiary’s other assets, it keeps those assets separate.

David Gardner is a certified financial planner professional at Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change.

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