Donating to a charity is a good way to support a cause, and it also provides tax benefits. It is possible for people who live in New York to donate to charity directly out of a traditional IRA, avoiding taxes for both the donor and the charitable foundation or organization.
IRAs and Taxes
In a traditional IRA, the money goes into the account before income taxes are taken out. Then the money grows as an investment over time, and when the account owner decides to start taking money out, they pay taxes on that distribution. There are also extra taxes due if the money is withdrawn too early, since it is supposed to be used for retirement expenses. However, there is a way to avoid paying taxes on withdrawals by making sure the withdrawal goes to a charity. This is called a qualified charitable deduction. A QCD does not incur taxes for the holder of the account and the charity does not need to pay tax on the donation, so it is a very efficient way to donate. Moreover, because it is a donation, it lowers the adjusted gross income of the IRA holder as well.
Donating in Retirement
The advantages of a QCD means that an IRA is a good place to make donations from for a person who is retired. Charitable giving is a win-win because of the AGI benefit, but people who have retired cannot simply donate from their salary income. Among all of their retirement accounts, a traditional IRA is likely the best one for retirees.
The traditional IRA presents a unique benefit for charitable donations.