When people think about making a charitable contribution, they usually start with the most obvious question, “How much would I like to donate?” While this is important of course, an equally important question may be, “Which of my assets should I use to make this donation?”
Cash, taxable investments, and retirement accounts can receive very different tax treatment when making a donation. Understanding those differences may help donors support IMSA while preserving more of their other assets for themselves and their families.
Taxable Investment Accounts
Most people are familiar with cash donations. Typically a charitable tax deduction is given on the full amount of the donation, with some exceptions if the gift makes up a large majority of the income earned for that particular year. Tax treatment begins to look a little different when talking about individually or jointly owned investment accounts. A taxable brokerage account may contain stocks, mutual funds or other investments purchased with money that has already been taxed. When an investment increases in value, selling it may create a taxable capital gain that donors need to be aware of.
For that reason, donors who own publicly traded securities that have appreciated and have generally been held for more than one year may consider transferring the securities directly to a qualified charitable organization rather than selling them and donating the proceeds.
A direct gift of appreciated securities provides two benefits. First, the donor may avoid recognizing the capital gain that would have resulted from selling the investment, saving themselves a potential capital gains tax. Second, donors who itemize may generally be eligible for a charitable deduction based on the asset’s fair market value,
As an example, suppose a donor purchased stock for $10,000 and it is now worth $25,000. Selling the stock could create a $15,000 capital gain. Donating the stock directly may allow the donor to avoid recognizing that gain while potentially receiving a charitable deduction for the stock’s current value of $25,000.
The opposite approach makes sense for an investment that has declined in value. In that situation, a donor should sell the investment, determine whether the resulting capital loss can be used on their tax return, and then donate the cash proceeds. Donating the security at a loss directly does not allow the donor to separately claim the unrealized loss.
These capital gain tax strategies are used commonly in investment accounts, but retirement accounts have their own set of tax rules that donors need to be aware of.
Retirement Accounts
Traditional IRAs, 401(k)s and similar retirement accounts generally contain money that has not yet been subject to income tax. Contributions and investment growth may have accumulated on a tax-deferred basis, but withdrawals are generally included in taxable income, except for amounts that were previously taxed.
That makes retirement accounts different from taxable investment accounts. A donor generally cannot simply transfer an investment from a 401(k) or traditional IRA to a charity and claim the same type of charitable deduction available for appreciated securities.
For many donors, withdrawing money from a retirement account and then writing a charitable check may be less efficient than expected. It’s for this reason that donors utilizing retirement funds to make charitable contributions should consider if they’re eligible to make a Qualified Charitable Distribution (QCD).
The Qualified Charitable Distribution
Retirement account owners who are at least age 70½ may have another option to donate: a qualified charitable distribution, commonly called a QCD.
A QCD is transferred directly from an eligible retirement account to a qualified charitable organization. When the requirements are met, the amount may be excluded from the donor’s taxable income and may count toward the donor’s required minimum distribution. Because the distribution is excluded from income, the donor does not also claim it as a charitable deduction.
For 2026, an eligible IRA owner may make up to $111,000 in qualified charitable distributions, subject to applicable rules.
QCDs generally must come directly from the retirement trustee or custodian. Distributions from a 401(k) do not ordinarily qualify, although some individuals may be able to roll eligible retirement funds into an IRA before making future QCDs. Donors should consult their financial and tax advisers before initiating a rollover or distribution.
It’s important to note that before making a significant gift, donors should coordinate with their tax adviser and financial adviser. The most tax-efficient decision depends on the type of account, the donor’s age, income, holding period, tax basis, charitable deduction limits and overall estate plan.
This information is provided for educational purposes only and is not intended as legal, tax or financial advice.