Are you at least 70.5, have a Traditional IRA and charitably inclined? If so, you may want to consider a Qualified Charitable Distribution, or commonly referred to as a QCD. In this blog post, I explain what it is, how it works, and when it may make sense to utilize this powerful tax planning and charitable giving strategy.
So, what is a Qualified Charitable Distribution? Most simply, a QCD is a distribution made from your Traditional IRA to a qualified charity….and “qualified” is the key word here. These qualified charities include 501c3 nonprofit organizations and churches.
It is also important to note here what is NOT a qualified charity. That would include distributions to family members, most private foundations, charitable trusts and vehicles called donor-advised funds. This is a strategy best utilized for pre-tax funds in your Traditional IRA or non-active SIMPLE or SEP IRA’s. This strategy cannot be utilized with qualified plans like a 401k, 403b or pension.
Now let’s move on to how this strategy may help in your tax planning and how it works.
QCD As A Tax Planning Strategy
By using QCDs as a tax planning strategy, it can help you fulfill your annual Required Minimum Distribution (RMD) from your Traditional IRA.
Let’s use a quick example…let’s say you have required minimum distribution for the year of $50,000. At the same time, you have a goal to keep your taxable income within a desired range for your tax planning and have a charitable giving goal you would like to have met. In this instance, it may make sense for you to donate $25,000 of that minimum distribution to the qualified charity of your choice, while then only realizing the income of the remaining $25,000 for income tax purposes. Now, not only have you met your charitable giving goal, but you have also done it tax efficiently…a win-win planning achievement!
There are a couple of additional and important planning points to note. One, you must be at least age 70.5 to make this specific type of charitable distribution and it must go directly from your IRA to the charity. Two, while there are no minimums in the amount of distribution that may be done, the maximum amount is $100,000 per person/per year.
To close, let me offer a quick summary of this tax planning strategy:
- A QCD is a donation made directly from a Traditional IRA to 501c3 nonprofit or house of worship. Donor advised funds, Charitable Trusts, and most private foundations are not eligible for this strategy.
- This is for individuals over age 70.5 with Traditional and/or inherited IRA accounts. Qualified plans like 401ks or 403bs and active SEP and SIMPLE IRAs are not eligible. This strategy is available at age 70.5, even though the RMD age is now 73.
- A maximum of $100,000 distribution per person/per year.
- This may satisfy all or part of your RMD or exceed it.
- This type of distribution is not included in adjusted gross income and helps to reduce your overall tax liability, thus making this strategy helpful for charitable retirees who no longer itemize.
This strategy may not only be helpful in the pursuit of your charitable giving goals, but also help you to do so more tax efficiently.