A tax-free way to use your IRA to help Pitt today

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Making a direct donation from your retirement account to your favorite charity could be the biggest tax-saving tip of the year. If you are over the age of 70-and-a-half and are required to take a minimum IRA disbursement this year, you could be paying a hefty income tax on the money you receive. But not if you directly donate the funds to charity.  

In 2016, Congress voted to make permanent a portion of the tax code that allows individuals 70-and-a-half and older to directly transfer funds from their IRA to a charity. Since they do not take possession of the funds, they are not counted as income.

“I think it’s a fabulous way for people to donate to charity,” said Amy Yurko, who holds both a law degree and a PhD in Economics from the University of Pittsburgh. “The limit is $100,000 but it’s also good for $50,000, $10,000 or whatever amount they can do.”

The procedure is more tax advantageous than simply taking the disbursement and then handing over the funds to the charity of their choice, according to Yurko, “especially now that we see more and more people working into their seventies. If you are still working, you might be in a fairly high tax bracket.”

That can be especially true for individuals who do not itemize deductions because they no longer have a mortgage or dependents. “If an individual withdraws $5,000 from his or her IRA, he or she may ultimately receive less than $3,000,” calculated Yurko. “However, transferring those same funds to a charity provides that institution with a full $5,000.” 

By not counting the disbursement as income, it allows the owner of the IRA to avoid other tax issues such as having to claim more of their social security as income or being subject to higher Medicare costs. For those with small adjusted gross incomes who want to make larger donations, this also helps them stay under the 50 percent charitable gift cap.

“This is a very popular way for individuals to support their favorite charity,” said Terry Brown who has more than 30 years’ experience helping donors with planned giving, the last 15 of which has been at Pitt. “They are using their minimum IRA disbursements to fund scholarships, support general operations, and much more.”

University of Pittsburgh graduate George Shiarella recently authorized substantial direct disbursements from his IRA to increase the size of his scholarship fund at the Swanson School of Engineering. “My philosophy has always been that any money I felt I could share . . . should be dispensed to people and entities that helped me make that money,” Shiarella said. “Think about what you really need to sustain any measure of lifestyle you now have, and start using the rest to be generous.”

Brown says it is also very simple to do. The donor only needs to contact the broker that holds their IRA and ask that a certain amount be transferred to the University. If the IRA contains a mix of taxable and non-taxable funds, the broker can make sure only the taxable dollars are used, leaving the non-taxable assets for later withdrawal when the holder might want them as income.

The savings grow in states like Pennsylvania, where neither the state nor municipalities allow for charitable gift deductions. For most Pennsylvania residents, that totals more than four percent.

“It’s just a smart move all around,” said Brown. “This way you can have the biggest and most immediate impact on your favorite charity with little or no impact on your budget.”