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By Christine Benz | 01-27-2016 01:00 PM

Tax-Saving Strategies for Charitably Inclined Retirees

The now-permanent qualified-charitable-distribution rules allow investors to donate to charity and reduce their tax bills, but that's by no means the only tax-friendly way to donate, says financial-planning expert Michael Kitces.

Note: This video is part of Morningstar's February 2016 Tax Relief Week special report.

Michael Kitces is a partner and the director of research for Pinnacle Advisory Group, and publisher of the financial planning industry blog Nerd's Eye View. You can follow him on Twitter at @MichaelKitces or connect with him on Google+.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Congress made the qualified charitable distribution permanent in late 2015. Joining me to discuss the QCD is Michael Kitces--he's a financial-planning expert.

Michael, thank you so much for being here.

Michael Kitces: Great to be here. Thanks.

Benz: Let's start with the qualified charitable distribution. This is something that Congress made permanent at the very end of 2015. So, this is news for a lot of charitably inclined retirees who are taking required minimum distributions from their accounts. Let's talk about the QCD--what it is exactly and why it can be a valuable maneuver.

Kitces: The QCD, or qualified charitable distribution, rules from our IRAs are rules that allow us to take money directly from an IRA and move it or donate it to charity. It's kind of the perfect tax wash. You don't report the IRA distribution in your income; you don't take a charitable deduction for the contribution, but that's only because, by definition, you just took money entirely pretax out of your IRA.

Now, there are some limitations to it. You have to be over age 70 1/2 when you actually do the qualified charitable distribution. So, it's not just the year you turn 70 1/2--you have to have actually hit that 70 1/2 birthday. You can only do it up to $100,000 in a particular year. But the flip side is it also satisfies any RMD requirements you have for the year. And of course, if you have to be over age 70 1/2 to do it, you will have some RMD obligations for the year as well.

So, this has become really popular as kind of the kill-two-birds-with-one-stone strategy: "I wanted to make some charitable contributions anyways and I had an RMD anyways, so I can move the money directly from the IRA, donate it to the charity, I satisfied my RMD, and I get my pretax charitable benefit by just pulling the dollars directly out of the IRA and sending them over."

Benz: So, do I let my charity deal with my IRA provider on that transaction? I'm not taking the money myself and acting as sort of a conduit, am I?

Kitces: You are not supposed to take the money yourself. The IRS rules have actually been pretty clear. If the money comes out of your IRA and it's payable to you, it's treated as a distribution to you. If you go and now write a check to your charity, you have a taxable distribution. If you wrote a check to the charity, you'll get a charitable deduction that will partially offset it, but you don't really get the benefit of the rules. For the full benefit of the rules, the money should be payable directly from the IRA to the charity.

You are still, as the IRA owner, going to have to initiate that; of course, no one else gets to take money from your IRA. You have to initiate that process. But when you request the IRA distribution from your IRA provider, you are going to tell them, "I'm making a distribution to a charity--here's the charity it's going to." The key thing is to have them make the check payable directly to the charity. The IRS rules said if you'd actually like to hold the check and hand it to the charity, that's OK. But the check has to be payable to the charity, not payable to you and you endorse it forward or write them a new one. The check should be payable directly to the charity and, ideally, you can just mail it to them directly as well.

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