Dear Liz: My wife and I are in our 70s and receive required minimum distributions from IRAs. We make our charitable contributions out of our RMDs. We have considered a donor advised fund. Which vehicle provides the best tax savings?
Answer: You would typically get the most tax benefit from qualified charitable distributions, which allow people 70½ and older to contribute money to charities directly from their IRAs. QCDs can satisfy required minimum distributions without increasing your adjusted gross income. That, in turn, can mean less taxation of your Social Security benefits and may help you avoid or reduce income-related surcharges on your Medicare premiums.
QCDs must go directly from your IRA custodian to the charity. A check issued by the custodian and payable to the charity can qualify even if you deliver it. It’s not a QCD if you receive the distribution and then pay the charity yourself.
Donor-advised funds work differently. You contribute cash or securities to the fund and may qualify for a tax deduction if you itemize. The contributions can grow tax-free until you direct the fund to make grants to eligible charities, potentially years later.
You can’t make QCDs to donor-advised funds, but these can be useful if you want to make several years’ worth of charitable contributions at once or donate appreciated securities. Donating those investments rather than selling them can avoid capital gains taxes.
For annual charitable giving from your IRAs, however, QCDs are likely the better choice. Talk to your tax pro about how to make sure your donations meet the QCD rules.
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