What is a Qualified Charitable Distribution (QCD)?
As people reach retirement age, they often start thinking about their legacy, and begin to ponder ways in which they can help support the charitable causes that are important to them. However, given the complexity of the US Tax Code, it can be challenging for many retirees to decide on the most effective and tax-efficient way to make charitable donations. One option that has become popular over the past few years is the Qualified Charitable Distribution (QCD).
Understanding Required Minimum Distribution (RMD) and its Connection to QCDs
A QCD is a tax-efficient way for those who are age 70 ½ or older to donate money directly from their Traditional IRA to a qualified charity. Not only does this option allow you to support your favorite charity (or charities), but it also provides for the opportunity to reduce your taxable income! It’s important to note that while the IRS allows taxpayers to deduct their charitable contributions as an itemized deduction, since 2018 many people have found themselves using the higher standard deduction on their tax returns, and therefore do not get the tax benefits associated with their charitable contributions.
Procedure for Making a QCD
Under current tax law, people aged 73 or older must withdraw a certain amount of money from their Traditional IRA each year, even if they don’t need the funds. This annual distribution is commonly referred to as the Required Minimum Distribution (RMD). Not only are these distributions required, but in almost all situations they are subject to ordinary income tax. When you perform a QCD, the distribution (as long as it is $100,000 or below), is not taxed as income! In order to make a QCD, you must instruct your Traditional IRA custodian to transfer funds directly from your IRA to a qualified charitable organization of your choosing. It’s important to emphasize the fact that the donation must go directly to the charity; it cannot be given to an individual, private foundation, or donor-advised fund.
Benefits of a QCD
While there are several benefits in making a QCD, it may not be the right strategy for everyone, so it’s important to speak with a financial advisor and/or tax professional to determine if it’s a good fit for your financial situation. The benefits of a QCD include:
- Lowering your taxable income – By making a QCD, you can lower your taxable income for the year. This can be especially beneficial for those who find themselves on the edge of the next tax bracket. In addition, if you make a QCD, you can apply it against your RMD for the year, which can help reduce your income tax burden.
- Fulfilling your charitable goals: A QCD allows you to support the causes that are important to you while also reducing your tax burden. This can be a win-win situation for both you and the charity!
Potential Downsides of a QCD
Some of the downsides of a QCD include:
- Limited to Traditional IRA funds – A QCD can only be made from a Traditional IRA. Therefore, if you have other types of retirement plans (i.e., 401k), you will not be able to take advantage of this strategy.
- No charitable deduction – Since a QCD is not considered taxable income, the IRS will not allow an individual to also claim a charitable deduction for the contribution on your taxes. This means you won’t get a tax break for the donation beyond the reduction of income tax.
- Limited to age 70 ½ and older – In order to make a QCD, you must be at least 70 ½ years old. Therefore, if you’re younger than age 70 ½, you will need to explore other options for making a donation to a charity.
Contact Zynergy Retirement Planning
A QCD can be a smart way for retirees to support charitable causes while also reducing their income tax burden. By making a donation from their Traditional IRA to a qualified charity, they can lower their taxable income, apply the donation against their annual RMD, and support a charitable cause that is important to them. To discuss QCD’s further contact Zynergy Retirement Planning.
