While many investors over the age of 70½ cringe over the tax burden from their yearly required minimum distribution from their IRA, some individuals look to donate that distribution to charity.
As I wrote in one of my previous articles, "Cash Flow Change Generates Tax Deduction,"I outlined a distinct difference between taking an IRA distribution and donating it to charity, versus an investor using a qualified charitable distribution from an IRA to maximize the full tax deductible benefit of the charitable gift. From my experience, clients struggle with these options.
I believe one of the main reasons is the investor's desire for more control over their charitable dollars, which, in some cases, generates the need to create their own private foundation. While most individuals may view private foundations as only available to ultra-wealthy families, that assumption is not exactly true. While it is true that these families have more reasons to create a private foundation due to the nature of their financial complexities, it doesn't mean other families don't have the same access to creating their own foundation.
A donor-advised fund allows any person or family to create their own version of a family foundation. Through firms such as the Fidelity Charitable Gift Fund,any investor can open a giving account similar to a family foundation. The client gets a full tax deduction for any gift made to their own giving account, and they can grow it and invest it, as well as request charitable distributions to their favorite charities over various years, months or other time periods. The best part about this is that an investor has no administrative responsibilities related to IRS compliance, as the main independent public charity takes care of all the related compliance.
So the benefit that a donor-advised fund offers investors that want to give to charity from their IRA is that a client can take their yearly required minimum distribution, and contribute the full amount to their own donor-advised fund – and it's fully tax deductible. The client gets a tax deduction against the IRA income,
