Did you know you can support your favorite charity and satisfy your required minimum distribution (RMD) for the year? A qualified charitable distribution (QCD) allows individuals who are age 70½ or older to make charitable donations directly from their individual retirement accounts (IRAs). The funds will never pass through the hands of the account holder, offering a seamless and efficient way to make charitable contributions. This type of distribution has gained popularity among retirees and offers several tax advantages.
Advantages of QCDs
One key advantage of a QCD is that it satisfies the required minimum distribution (RMD) rules. Typically, you are required to take an annual minimum distribution from your Traditional IRA starting at age 73. (Prior to January 1, 2020, it was 70½, which is why the QCD minimum age was set at 70½.) This distribution is required, whether or not you need or want the funds. Failing to do so can result in hefty penalties. By making a QCD, you can satisfy your RMD obligation while also benefiting a charitable cause.
Another advantage of a QCD is that it can reduce your taxable income. Since the distribution is excluded from the taxpayer’s income, it can help lower your overall tax liability. This exclusion provides significant tax benefits, especially for individuals who don’t itemize their deductions or have already reached their maximum limit for deducting charitable contributions.
It is worth noting that a QCD cannot be claimed as an itemized deduction on an individual’s tax return. However, the tax benefits are realized by excluding the distribution from taxable income, resulting in potentially lower overall tax liability.
As with any financial or tax-related decision, it’s recommended to consult with a tax professional or financial advisor before making a qualified charitable distribution. They can help ensure that all eligibility requirements are met, and that the donation strategy aligns with your overall financial goals.
How does it work?
To be considered a QCD, certain criteria need to be met.
- The individual must be 70½ years of age or older and required to take an RMD.
- The QCD requires a direct transfer to a qualified charity.
- The total QCD cannot exceed the annual limit of $100,000 per taxpayer. Married couples can each make a charitable contribution up to the $100,000 limit for a maximum of $200,000.
- The individual cannot receive a benefit from the QCD, i.e., use the funds to purchase an item at an auction for charity.
The distribution can be made from several types of IRAs, including traditional, inherited, or an inactive SEP or SIMPLE IRA. You can contribute to more than one charity, and you can make several smaller contributions throughout the year up to the limit. The QCD can also be larger than your RMD, but the excess cannot carry over to fulfill future RMD obligations.
QCDs are not reflected as tax-free on the IRS form 1099-R and will appear as a normal distribution. It is up to the client to notify their tax preparer that some or all of that distribution was a QCD. Individuals should receive acknowledgement of the donation to claim a deduction.
What is considered a qualified charity?
Eligible charities must be 501(c)(3) organizations. Public charities have the necessary tax-exempt status to receive these distributions and are the primary type of charitable organization that can receive QCDs. This includes religious organizations, educational institutions, and government entities. Check the IRS website to verify if your charity is a tax-exempt organization.
It’s important to note that while public charities are eligible to receive QCDs, other types of charitable entities do not qualify. You cannot make a contribution to private foundations, donor advised funds, supporting organizations, charitable remainder trusts, or charitable annuity trusts.
Is a qualified charitable distribution the best choice for me?
If you are over 70½ and do not need your RMD as income, QCDs are a great way to satisfy your RMD obligation while supporting a cause you care about. Also, if you’re in a situation where taking an RMD would push you into a higher tax bracket, a QCD can help keep your taxable income lower. However, since QCDs can only be used to satisfy your RMD obligation, if you have already satisfied it through other means, making a QCD may not provide any additional benefits.
QCDs can have an indirect impact on other aspects of your taxes, as well. By lowering your taxable income, you may also lower your overall tax liability and potentially increase your eligibility for certain tax deductions or credits. However, it’s essential to consult with a tax professional or financial advisor to fully understand the tax implications and benefits specific to your situation.
In conclusion, qualified charitable distributions are a generous and tax-efficient way for you to support your favorite charities. By making direct donations from your IRA to qualified charitable organizations, you can enjoy tax benefits, satisfy your RMD obligations, and make a positive impact in your community. As always, Quest is here to answer questions about distributions and your retirement account, so feel free to give us a call or schedule a 1 on 1 with one of Quest’s IRA Specialists.