For individuals looking to make a significant impact through charitable giving while maximizing their tax benefits, Qualified Charitable Distributions (QCDs) can be a powerful tool. A QCD allows you to donate to a charity directly from your Individual Retirement Account (IRA), providing benefits for both you and the charity. This article will cover the key benefits of QCDs, as well as the requirements you must meet to take advantage of this opportunity.
WHAT IS A QUALIFIED CHARITABLE DISTRIBUTION (QCD)?
A Qualified Charitable Distribution is a direct transfer of funds from your IRA to a qualified charity. It allows IRA owners, who are at least 70½ years old, to donate up to $105,000 per year to charity directly from their traditional IRA without including the distribution in their taxable income. If you file taxes jointly, your spouse can also make a QCD from their own IRA within the same tax year, up to $105,000. QCDs are a great way to support charities while simultaneously meeting some of your financial objectives, particularly when it comes to managing required minimum distributions (RMDs) and taxable income.
KEY BENEFITS OF USING QCDS FOR CHARITABLE GIVING
1. Avoid Paying Income Tax on IRA Distributions
Normally, any distribution you take from your IRA is included in your taxable income. However, QCDs are excluded from your taxable income, meaning you can give directly to a charity and avoid paying federal income taxes on that distribution. This can result in significant tax savings, especially for individuals in higher tax brackets.
2. Satisfy Required Minimum Distributions (RMDs)
Once you reach age 72, the IRS requires you to take RMDs from your traditional IRA each year. These distributions are typically taxable. By using a QCD, you can satisfy all or part of your RMD for the year without increasing your taxable income. This is particularly beneficial for individuals who don’t need the income from their RMDs but are still required to take them.
3. Reduce Your Taxable Income
Lowering your taxable income can offer several financial advantages. By reducing the amount of income reported on your tax return, you can avoid being pushed into a higher tax bracket, prevent the phaseout of other deductions, and even reduce your exposure to the Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges.
4. Support Charities You Care About
Aside from the tax benefits, QCDs provide a meaningful way to support the charitable causes you care about. Whether it's your church, a local nonprofit, or a national charity, QCDs allow you to make a significant impact in the community while potentially improving your own financial situation.
A QCD GIVING EXAMPLE
Suppose your RMD is $12,500, your annual giving to your church is $5,000, and your tax bracket is 22%.
Here is what could happen
without using a QCD:
- You withdraw your RMD of $12,500.
- You pay $2,750 in federal income taxes due to the withdrawal.
- Then you gift the church $5,000 which is below the standard deduction.
- Your taxes were not reduced. You net $4,750.
Here is what could happen
using a QCD:
- You send a QCD payment from your RMD to your church for $5,000.
- Then you withdraw your remaining RMD of $7,500.
- You now pay only $1,650 in federal income taxes.
- Your taxes were reduced by $1,100. You net $5,850.
QCD REQUIREMENTS AND ELIGIBILITY
While QCDs offer significant benefits, there are specific rules and requirements you must follow to qualify. The following requirements were applicable on the date of publication. As always, it’s important to consult with a financial or tax advisor to ensure that a QCD is the right strategy for your financial situation and to stay up to date with current tax laws.
1. Age Requirement
To make a QCD, you must be at least 70½ years old at the time of the distribution. It's important to note that the IRS sets this specific age requirement, so any charitable donations made from your IRA before reaching this age will not qualify as a QCD.
2. IRA Types
QCDs can only be made from traditional IRAs or inherited IRAs. Distributions from SEP IRAs or SIMPLE IRAs generally do not qualify unless they are inactive, meaning no employer contributions have been made for the year.
3. Qualified Charities
Not all charities are eligible to receive QCDs. The charity you choose must be a qualified 501(c)(3) organization recognized by the IRS. Private foundations, donor-advised funds, and supporting organizations do not qualify for QCDs.
4. Annual Contribution Limit
The maximum amount you can transfer via QCDs is $105,000 per year. If you file a joint tax return, your spouse can also donate up to $105,000 from their IRA, resulting in a combined maximum of $210,000 per year.
5. Direct Transfer Requirement
To qualify as a QCD, the funds must be transferred directly from your IRA to the charity. If you withdraw the funds first and then donate them, they will be treated as a taxable distribution, and you won’t receive the QCD tax benefit.
6. Record Keeping and Reporting
For tax reporting purposes, you should keep an acknowledgment letter of the donation. Make sure your IRA custodian is aware that the distribution is a QCD, so they correctly report it to the IRS.
FINAL THOUGHTS: A WIN-WIN GIVING STRATEGY
QCDs offer a unique opportunity for IRA owners to satisfy their RMDs, possibly reduce their taxable income, and give generously to charities. Whether you’re looking to lower your tax bill, avoid RMD penalties, or contribute to causes that matter to you, QCDs could provide a win-win strategy for charitable giving.
LET’S TALK
At TruWealth Advisors, we are committed to helping you navigate the intricate world of financial planning. Our team of skilled financial advisors can work with you to understand your risk tolerance and develop a personalized strategy. Whether you’re approaching retirement or seeking a second opinion on your charitable giving strategies, we're here to assist you. Contact us today for a no obligation initial consultation to explore options that best align with your personal financial goals.
Additional Resources
- Read more about QCDs at Fidelity Here.
- Read another of our giving articles on Donor-Advised Funds.
Disclosures
TruWealth Advisors, LLC is an SEC registered investment adviser located in Louisiana. Registration does not imply a certain level of skill or training. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or financial advice. You should consult your own tax, legal and financial professionals before engaging in any transaction. Past performance does not guarantee future results. Additional information about TruWealth Advisors, including our registration status, fees, and services is available on the SEC’s website at https://adviserinfo.sec.gov/firm/summary/306876.