For more than four decades, the individual retirement account (IRA) has been the go-to savings vehicle for retirement savers who are looking for a current tax deduction and tax-deferred earnings. Most people simply contribute to their IRA each year and then use it in retirement to supplement income. However, IRAs are a little more versatile than most people realize. For instance, did you know that IRAs allow for checkwriting?
What is IRA Checkwriting?
As the name implies, IRA checkwriting is simply using your IRA to write checks. It’s actually a form of a withdrawal from your IRA, which you are allowed to do without penalty after age 59 ½. Like any withdrawal, writing a check from your IRA is considered a taxable distribution, reported to the IRS on Form 1099-R. For custodians that support IRA checkwriting, there is usually a minimum amount that can be withdrawn, such as $250, and a maximum number of checks that can be written annually, typically six.
Tax Benefits of IRA Checkwriting for Those over 70 1/2
For individuals over 70 ½ who are taking the required minimum distribution (RMD) from their IRA, writing checks from their IRA is a convenient way to make contributions to qualified charities and non-profit organizations. In many cases, these individuals don’t need the income from their IRA but are forced to take withdrawals due to the RMD rule. This can have the effect of increasing their taxable income, which can also impact their social security taxes.
However, if you are charitably inclined, you can offset that unwanted income by donating to your favorite charities. The tax code allows for a Qualified Charitable Distribution (QCD), in which you can donate up to $100,000 from your IRA without having it added to your taxable income. In other words, it’s a transfer from your IRA to a charity that satisfies your RMD for the year, but it’s not counted as a taxable withdrawal. To qualify, the donation has to be a direct transfer (the money can’t be transferred to you first), which is what occurs when you write a check from your IRA.
This is especially beneficial if you now fall within the higher standard deduction guidelines of the Tax Cuts and Jobs Act and are unable to take any charitable deductions. The QCD effectively passes along your unwanted RMD to a charity, which is the same as getting a tax deduction.
Besides being beneficial for individuals taking the standard deduction, it may also help to minimize your medicare insurance premiums. Since charitable contributions directly from an IRA do not count toward your income, you may remain in a lower tax bracket for medicare premiums. Read IRMAA: The Hidden Medicare Tax to learn more about this.
It is important to note that any direct payment to a charitable organization from your IRA, though not taxable, will not be considered an itemized deduction. Read Charitable Giving Tips in Light of the New Tax Law for more pointers on maximizing your tax savings
If you are under 70 ½ and don’t take a Required Minimum Distribution, you would not receive the same kind of tax benefit from contributing to a charity using IRA checkwriting.
Other Considerations Using IRA Checkwriting for Qualified Charitable Distributions
You need to check with your custodian about its checkwriting procedures. Some custodians don’t have checkwriting privileges while others have varying rules and limitations.
Because there are reporting and timing issues with a QCD, you should notify and consult your tax advisor to ensure it is reported correctly. There is no way for your accountant to know whether a check written from an IRA was a qualified charitable distribution. If your accountant is unaware you are using this strategy, you will not get the full tax benefit.
Also, you must make your QCD before the date of your RMD. The IRS doesn’t care when the check was written, only when it clears, which is important to remember if you issue checks near the end of the year.
By taking the time now to meet with and discuss this option with your tax advisor, you can structure a plan to maximize the benefits of using IRA checkwriting.
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*Steven G. Albert is not registered with Triad Advisors.