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Saturday, April 27, 2024
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Case Studies |
Judy - Standard Deduction and the IRA Rollover
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Case:
Judy was a retired nurse and a volunteer for her favorite charity. During her working years Judy had never enjoyed a large salary. Fortunately, a portion of her income was regularly transferred to her retirement plan for almost 40 years. With good investments and tax-free growth, Judy's retirement plan had increased to over $435,000.
Question:
Judy is now age 78, owns her home and has more income then she needs. Each year she makes a gift of $1,000 to her favorite charity. Because she does not have home mortgage interest or other deductions to itemize, Judy takes the standard deduction. But she has heard about the IRA charitable rollover and wonders if that will be a good option. She asked her best friend, "Do you think that I should give the $1,000 from my IRA?"
Solution:
Each year Judy is withdrawing the $1,000 as part of her required minimum distribution. It increases her income by $1,000. Because she gives the $1,000 to charity and takes the standard deduction, Judy does not reduce her income taxes with her gift. She has increased income of $1,000 from her IRA, but no added charitable deduction.
A better plan is for Judy to gift the $1,000 directly from her IRA to charity. This will reduce her income by that $1,000 and will save taxes as well.
Judy was pleased that to learn that she could rollover $1,000 directly from her IRA to her favorite charity. Best of all, Judy was able to make the gift and reduce her current taxes. Judy spoke with her best friend and noted, "An IRA charitable rollover is a great plan. I helped those in need through my favorite charity, and also lowered my taxes!"
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