Dear Dan,
I’ll turn 70 ½ this year and want to use pretax money for my donations. Can I do that from my 401(k)?
–Paul
Dear Paul,
No, direct donations from a 401(k) to charity are not permitted. If you are still working and your plan allows in service distributions, you could take a distribution and subsequently donate it to charity but you may get little to no tax benefit from doing so if you do not itemize deductions.
The far better way to donate retirement money is to make those gifts directly to charity from an IRA via a qualified charitable distribution. if you donated as a QCD from your IRA, all of the donation is excluded from income as though it were 100% deductible. For those 73 or older, a QCD will count toward the taxpayer’s Required Minimum Distribution (RMD) even though it is distributed tax -free.
If you want to make a QCD but do not have an IRA, you will first need to get money into an IRA. You can transfer retirement accounts from a former employer to an IRA or, if allowed by your current plan, perform an in-service distribution and transfer some of your active pretax 401(k) funds to an IRA account. Your plan’s Summary Plan Description will say if in-service distributions are permitted.
Once funds are in an IRA there are a few requirements to get the tax break:
- You can donate to as many charities as you like as often as you like up to a total of $100,000 of donations per taxpayer, per year.
- The checks must be made payable to the charities.
- The charities must be 501(c)3 public charities.
- You must be at least 70½ years old at the time of the donation.
There are some nuances with QCDs so it is good to confer with your tax adviser about making these donations. To make a QCD, you request a distribution from the provider holding your IRA. The check should be made payable to the charity, not to you. Despite the check being made payable to the charity, most IRA providers will give you the option to have the check mailed to you, so that you can present the check to the charity personally.
Alternatively, many IRA providers will provide a checkbook on the IRA for QCD purposes. Just make sure the charity cashes the check before Dec. 31, so the donation is properly included on the 1099-R the provider will issue.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.
