Transcripts

"Kevin McCormally's Tax Tips"-IRA Withdrawal

SUSIE GHARIB: As this year winds down, it's time to think ahead to tax season and our tax guru Kevin McCormally is here to help. He's the editorial director at Kiplinger's Personal Finance. In tonight's tax tips, advice on avoiding taxes when you withdraw funds from IRA's.

KEVIN MCCORMALLY, EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: If you or perhaps a parent or grandparent, have to take money out of IRA before the end of the year, as you know, the law requires that you begin withdrawing funds from traditional IRAs starting the year you reach age 70 1/2. Failure to take out enough can subject you to a whopping 50 percent penalty. But what if you don't really need the money? You still have to get it out of the account so the IRS gets a chance to tax it. But there's a relatively new way around that.

IRA owners who face mandatory distributions can add up to $100,000 a year of IRA money donated directly to charity. So if you're planning a charitable contribution before the end of the year, consider whether it makes more sense to use a direct IRA donation rather than giving cash. Money that goes from your IRA to a charity won't show up on your tax return as income. Now, there's no double dipping allowed, so you won't get to deduct the amount, too. But keeping it out of income in the first place is a better deal. For one thing, that ensures that higher income won't make more of your Social Security benefits taxable or trigger the squeeze on the value of your personal exemptions or itemized deductions.

And, if you're among the two thirds of Americans who don't itemize deductions, going this route is sure to save you money. Check with your IRA sponsor about the mechanics of making a direct donation to charity. If the money is paid to you rather than going directly to the charity, you lose this opportunity. And one final point, as the law stands now, this is supposed to be the last year that direct IRA donations will be allowed. But we think Congress will get around to extending this break for future years, too. I'm Kevin McCormally.