Did you know that when investors with IRAs turn 70 ½ they are forced to begin taking Required Minimum Distributions (RMDs) from their account, even if they don’t have a current need or desire for the funds? Unfortunately, this can cause their income tax rate to rise and phase out other tax benefits. Luckily there is an alternative option for those who want to avoid this predicament: Qualified Charitable Distributions.
What is a Qualified Charitable Distribution?
A Qualified Charitable distribution, or QCD, is a direct donation from an IRA to a qualified charity. Funds donated through a QCD are excluded from taxable income. Not only does this allow you to avoid paying taxes on a distribution for which you currently have no need, it also lowers your overall taxable income for the year. Since donations will reduce the balance of your IRA, it also helps lower future RMDs.
What is the limit and how are donations made?
The maximum annual amount that qualifies for a QCD is $100,000. This limit is per person, meaning it applies to the sum of all QCDs made from all IRAs in any given year; it is not on a per-account basis. You can choose to make one lump sum donation, or a myriad of smaller contributions throughout the year. Any number of charities may be supported as long as the total remains under the $100,000 limit.
It’s important to note that donations must be made directly from your IRA custodian to a charity, and therefore, any funds withdrawn and then donated will not qualify. If you have a SEP or SIMPLE IRA plan, QCDs can only come out if those accounts are inactive, which are plans that have not received contributions from you or your employer during the same year as the donation.
Which charities qualify for a QCD?
To qualify, a charity must be a 501(c)(3) eligible to receive tax-deductible contributions. Types of charities which do not qualify include private foundations, supporting organizations, and donor-advised funds. The IRS offers a searchable database of qualified charities on their website.
How is a QCD different from a charitable donation?
When a person makes a traditional charitable donation, it can be listed as an itemized deduction on their tax return. Qualified Charitable Distributions cannot be itemized. However, with the recent changes in tax law a person can opt to take the higher standard deduction and still use QCDs to lower their taxable income.
Limitations of QCDs
There are a few limitations to be aware of when considering a Qualified Charitable Contribution. As mentioned above, active SEP or SIMPLE IRAs cannot make QCDs. Additionally, donors cannot receive any benefits for making a QCD. For example, a QCD cannot be used in a charity auction or to purchase tickets to a charity event.
Is a QCD right for me?
Choosing whether to make a Qualified Charitable Distribution is a personal decision and, like most aspects of retirement planning, depends upon your individual circumstances. For some, it provides the benefit of philanthropy while also offering tax relief right away and lowering RMDs for years to come. State tax rules on QCDs will vary so donors should consult a tax professional when considering donations.