A Qualified Charitable Distribution (QCD) is a donation made from an IRA directly to a qualified non-profit organization. It can be a very tax-efficient way to support your favorite charities. Let’s review some quick facts about QCDs to see if they make sense for you.
Fact #1: You need to be at least 70 ½ to make a QCD.
You can make a QCD starting at age 70 ½ from your IRA directly to a qualified charity. At age 72, a QCD will count towards your annual Required Minimum Distribution (RMD). Timing of the QCD relative to when you take other IRA distributions is important, so check with your CPA.
Fact #2: You will not pay income taxes on the QCD amount.
While distributions from retirement accounts are included as ordinary income on your federal tax return, QCDs made directly to a qualified charity are not taxable. The QCD will lower your Adjusted Gross Income (AGI), which may allow you to stay in a lower tax bracket, reduce or eliminate the tax on your Social Security benefits, and reduce your Medicare payments.
Fact #3: You can only complete the QCD from an IRA.
The QCD can be completed from a traditional, rollover, SEP or SIMPLE IRA. If you have a 401k or 403b retirement account, they can usually be rolled over into an IRA so you can complete the QCD.
Fact #4: Each year, you can donate up to $100,000 as qualified distributions.
For married couples, each spouse can make QCDs up to the $100,000 limit, for a potential combined total of up to $200,000. The gifts can go to multiple charities and will count as fulfilling your annual RMD. However, the distributions cannot be made to Donor Advised Funds or private foundations. Also, the donor cannot receive a benefit from the donation, like university football tickets or a spot in a charity golf tournament.
Fact #5: While the QCD is excluded from your income, you will not also receive an income tax deduction for the gift.
You don't need to itemize to receive the full tax benefit. That means you may take advantage of the high standard deduction, but still use a QCD for tax-efficient charitable giving.
Fact #6: The funds must be distributed directly to the charity from your IRA.
You cannot write a check to the charity and reimburse yourself from your IRA for the donation. A QCD must go directly from your IRA to the charity to be excluded from your taxable income.
Fact #7: You need to tell your accountant about the QCD.
The tax statement you receive from your custodian will show the total distribution amount from your IRA, but it will not separate out the QCD amount. You will need to provide the QCD amount to your accountant so they can report it on your tax return. Be sure to keep the donation acknowledgement letter from the charity for your records as well.
While a QCD may not be the right strategy for every investor, it can be a great way to gift funds to your favorite charities while minimizing your tax liability. Talk to your accountant and financial advisor to learn more about completing a QCD and to determine if it is the best fit for your specific situation.
Terri Velgara, CFP®
Terri is a Financial Advisor and Director of Financial Planning at Rappaport Reiches Capital Management. She serves as a resource for our firm's advisors in designing plans that empower clients to achieve their personal and financial goals. Please connect with Terri below. She loves to talk about investing, financial planning, and family game nights!