The beginning of a new year is a good time to plan charitable giving strategies for the upcoming year. Taking the time to do this kind of legacy planning now can maximize not only the impact of your charitable gifts, but also the tax benefits you may receive from making these gifts.
A unique giving opportunity exists for couples and individuals who are 70½ years of age or over. By utilizing what’s known as a Qualified Charitable Distribution (or QCD), you can meet the requirement to take minimum distributions from your IRA and help support charitable causes you believe in at the same time.
How QCDs Can Help with RMDs
Once you reach age 70½, the IRS necessitates taking required minimum distributions (RMDs) from your IRA regardless of whether you need the money or not. Since IRAs are tax-advantaged retirement accounts, the government won’t let you keep the money in them forever.
When you start taking IRA distributions, you’ll have to pay taxes on the withdrawals at ordinary income tax rates. This can result in extra taxes that can put a crimp in your retirement finances.
This is where QCDs come into play. Using these, you can distribute up to $100,000 directly from your IRA to a qualified charity. When given this way, IRA distributions are not considered taxable income to you, which means you don’t have to pay income tax on the distributions, yet the donation still helps to satisfy the requirement for a minimum distribution.
QCDs are Now Permanent
QCDs were first introduced temporarily in 2006. Until recently, the rule allowing QCDs had to be renewed by Congress every year, which obviously resulted in a certain amount of uncertainty around this particular planning topic.
This uncertainty changed with the passage of the Protecting Americans from Tax Hikes (PATH) Act in 2015, which finally made QCDs permanent. As a result, these days you can incorporate QCDs into your charitable giving and tax strategies each year(unless the rules change, that is!).
More QCD Benefits
There are several other potential benefits to using QCDs in addition to relieving the tax burden posed by having to take RMDs, including the following:
- Initiating a QCD from an IRA does not impact your adjusted gross income (AGI). A number of different phase-outs for certain taxes and tax breaks are based on AGI — such as those for itemized deductions, the net investment income tax, Roth IRA contribution eligibility and certain exemptions — so this is an important consideration.
- You can bypass the rule that restricts charitable giving to a percentage of your AGI. Distributing money directly from your IRA to a charity using a QCD effectively reduces your AGI even if your contribution would have exceed the percentage limit of AGI.
There are several important criteria that must be met to initiate a QCD. For example, you must be at least 70½ years old by the end of the year when the distribution is made. Also, the distribution must be made from a traditional, rollover or inherited IRA — it cannot be made from a SIMPLE or SEP IRA.
Perhaps most importantly, the QCD funds must be distributed directly from the IRA to the charity itself. Practically speaking, this means the check should be made out to the charity, not to you personally. Take note: If it’s made out to you, the distribution will be a taxable event and you’ll lose the benefits of using a QCD.
Also make sure that the organization you’re giving the money to is a qualified public charity, or in IRS parlance, a 501(c)(3) organization. It’s also advisable to get a confirmation letter from the charity stating you didn’t receive anything of value in exchange for your gift.
To initiate a QCD, simply submit a distribution form to the IRA custodian requesting that the check be made out directly to your desired charity. The check can be sent straight to the charity or to you if you prefer to deliver it to the charity yourself.
As you plan your charitable giving and tax strategies for 2018, think about whether utilizing a Qualified Charitable Distribution might be a wise move. And be sure to speak with a financial advisor and tax professional about your specific tax and financial situation in more detail.
Contact a Financial Advisor
This blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.
Paul Deer, CFP®
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