If you are looking for a tax-saving strategy and you like the idea of helping others, a qualified charitable distribution (QCD) might be right for you.
How They Work
A QCD lets you directly transfer up to $100,000 in tax-deferred retirement savings to the qualified charity of your choice tax-free. So instead of liquidating the assets, paying taxes and then donating the proceeds — a transaction that must be included in adjusted gross income (AGI) — you simply donate the money directly and avoid a taxable event.
Your AGI determines how much you’ll pay in taxes and it can make a significant impact for wealthier individuals. Not only does AGI determine your tax bracket, but it can also be used to limit you from other tax exemptions and may result in you paying higher Social Security premiums for Medicare Part B and Part D.
Perhaps you’re thinking you may not need a lot of income in retirement, but it’s important to remember that the IRS requires you to take minimum distributions from your retirement accounts once you reach a certain age regardless of need. These distributions are all it takes to bump up your AGI.
To take advantage of a QCD, one must meet the following requirements.
- Individuals must be 70 ½ or older.
- The selected charity must qualify for a charitable income tax deduction by an individual (not including a private foundation), a donor-advised fund or a supporting organization under Internal Revenue Section 509(a)(3).
- The charity that receives the donation must provide a contribution acknowledgment. Failure to obtain the acknowledgment will invalidate the QCD.
- QCD may be made from any IRA or individual retirement annuity, but not from a simplified employee pension, a simple retirement account or an inherited IRA.
- The maximum annual amount that can qualify for a QCD is $100,000 per person and gift-splitting is not allowed. For example, an IRA owner couldn´t make a distribution of $200,000 from their own IRA and split that gift with his or her spouse.
- If more than $100,000 is withdrawn from the IRA and contributed to a charity, there is no carryover to a future year. The amount over the $100,000 threshold is taxable income and a charitable deduction can be claimed only if the taxpayer itemizes.
- QCD apply only to taxable amounts and don’t include non-deductible IRA contributions. This is an exception to the pro-rata rule, which usually applies to IRA distributions.
- QCD cannot be made from IRAs receiving ongoing contributions. If you have terminated a SEP or SIMPLE IRA or are no longer making contributions, then you can make a QCD from that account.
An Important Consideration
Please note that funds distributed to you and then donated to a charity do not qualify for QCD treatment. This strategy only works if you donate the funds directly from your IRA.
Getting Started
QCD can be a highly advantageous way for a charitably-minded individual to donate, but they may not be the best approach for everyone. Talk to with a member of our team about tax strategies that can benefit you and your favorite charities the most. We can help you pursue your financial goals and avoid costly mistakes that are easy to make without the right investment and tax knowledge.