Say you’ve reached the age at which you must annually take required minimum distributions (RMDs) from your traditional IRA, but you’re in the fortunate position of not needing the funds. If you skip a distribution, you’ll probably be hit with a penalty of 50% of the amount you should have distributed but didn’t. One alternative may be a qualified charitable distribution or QCD.
Reap the Benefits
With a QCD, not only can you support a worthwhile organization, but, in contrast to most IRA distributions, the amount will be excluded from your taxable income. That means you don’t need to claim a charitable deduction to reap the tax benefits of the charitable gift — the distribution simply doesn’t appear in your income.
This can be especially advantageous for taxpayers whose total itemized deductions wouldn’t exceed their standard deduction because they wouldn’t benefit from claiming a charitable deduction. It can also help some taxpayers stay under various income-based phaseouts and thresholds that can reduce other tax benefits or trigger certain taxes.
A QCD requires that funds move directly from an IRA to an eligible charity. In other words, you can’t receive the distribution and then later donate it. To initiate a QCD, you must be at least age 70½.
You can make QCDs to multiple charities. But the per-person maximum for all QCDs in one year is $100,000. If you’re a joint filer, your spouse can also make QCDs, again up to $100,000.
You can make a QCD only from an IRA — not from another retirement plan like a 401(k) plan. If you’d need money from another retirement plan to complete a QCD, you’d first need to roll it into an IRA.
The organization receiving the funds must be a 501(c)3 charitable organization and eligible to receive tax-deductible contributions. After making a QCD, you should receive the same type of acknowledgment you’d normally receive when claiming a deduction for a charitable contribution. Because a QCD lowers your taxable income, you can’t also use it to claim a charitable tax deduction.
Do Well by Doing Good
Be aware that the age at which RMDs must begin has changed under last December’s Setting Every Community Up for Retirement Enhancement (SECURE) Act. For anyone who didn’t reach the age of 70½ by the end of 2019, the new age will be 72. The SECURE Act didn’t, however, change that age in relation to QCDs.
A qualified charitable distribution can help you both lower your taxable income and support a qualified charity. Your accounting professional can help you determine how a QCD might fit into your tax and charitable planning and can assist in helping you comply with the rules.