Skip to content

Articles

September 23, 2021

Mailing List

There are currently 1430 subscribers.

Planning Your IRA Withdrawal Strategy: Qualified Charitable Distributions (QCD’s)

JUSTIN_HEARTY_SHORT Justin Hearty | Articles

Read Time: 2:30 min

The ins and outs of Qualified Charitable Distributions (QCD’s)

Contributed by Benjamin Saltzman , Justin Hearty

Upon turning age 72, the IRS requires you to begin making withdrawals from certain qualified retirement account(s) annually. These required withdrawals are commonly referred to as an annual required minimum distribution (RMD). These RMDs are generally taxable to the recipient as ordinary income. For those relying on the distributions as an income source to fund their expenses things are relatively straightforward… Each year you calculate the amount you are required to withdraw, ensure you meet at least the minimum withdrawal amount, and use the funds to cover your expenses.

However, for those who don’t need to rely on their RMDs to fund their expenses, and who are charitably inclined, there are planning strategies available to benefit both you and the charitable organizations you wish to support. One long-standing strategy employed by many such individuals is known as making a Qualified Charitable Distribution (QCD). A QCD is a distribution of funds, tax-free, from your individual retirement account directly to a qualified charity. In this post, we outline some of the primary reasons why you would use a QCD and highlight some of the most notable requirements to keep in mind. As always, we recommend you consult with your Financial and Tax Professionals to determine the best strategy for your particular situation.

Important QCD Requirement Details:

  • QCDs can be made from both Traditional and Roth IRAs, including rollover and inherited IRAs. Additionally, QCDs may be made from SEP IRA and SIMPLE IRA plans only if those plans are considered inactive. Inactive status for SEP and SIMPLE IRAs means that there have not been any employer contributions made for the plan year ending with or within the year in which the QCD would be made (see IRS Notice 2007-7, Q&A 36)
  • Account owners and beneficiaries must be 70 ½ years old. A common point of confusion is that the recently increased Required Minimum Distribution (RMD) required beginning age was increased from 70 ½ to 72 while the QCD minimum age of 70 ½ remains unchanged.
  • Qualifying charities must have a 501 (c) (3) designation. You can use this IRS.gov site to search eligible tax-exempt organizations.
  • The maximum QCD amount is $100,000 per person, per year.
    • If you are married, you and your spouse can each contribute up to $100,000
    • If more than $100,000 is contributed to the QCD, you may not carry over the excess to a future year. Any amount in excess of the maximum will be treated as a taxable distribution.
$100,000
The maximum amount for a Qualified Charitable Distributions (QCD’s) per person, per year.

QCD’s can be used to satisfy your RMD for the year as long as the QCD is made before the RMD becomes due

  •  QCD’s can be used to satisfy your RMD for the year as long as the QCD is made before the RMD becomes due
    • A QCD is not limited to your RMD amount so long as it does not exceed $100,000
    • There is no limit to the number of charities a QCD can be sent to as long as the total does not exceed $100,000 per person, per year

QCDs provide tax-efficient means of supporting charitable causes.

  • QCDs are excludable from taxable income
  • They may be used to satisfy RMD requirements for a given year (up to the previously mentioned $100,000 per person annual maximum)
  • They may lower taxable income – in some cases, the reduction in taxable income is enough to so that the individual may even avoid being subject to additional Medicare premiums

For Tax Reporting:

  • Report as a normal distribution on IRS Form 1099-R for any non-inherited IRA
  • Report as a death distribution for Inherited IRA’s or Inherited Roth IRA’s
  • Be sure to collect documentation of the donation to claim the deduction
  • A QCD is not subject to withholding. State tax rules may vary

QCDs provide charitably inclined individuals who are not relying on their RMDs to fund their living expense needs with a mutually beneficial way to maximize their charitable impact in a potentially tax-favorable way.

Justin Hearty, ASSOCIATE PLANNING SPECIALIST

 

Bottom Line

QCDs provide charitably inclined individuals who are not relying on their RMDs to fund their living expense needs with a mutually beneficial way to maximize their charitable impact in a potentially tax-favorable way. Beyond the philanthropic motivations of utilizing QCDs, they provide numerous potential benefits such as…

  • An immediate reduction in taxable income – The QCD is excludable from taxable income.
  • A tax-favorable way to satisfy an otherwise unneeded RMD as the QCD may count towards the individual’s required minimum distribution (RMD) for the year
  • Reduced or altogether avoided additional Medicare premiums for those whose QCDs reduce their taxable income enough to fall below the supplemental Medicare premium thresholds.
  • Even those who may not be able to utilize QCDs may have opportunities to optimize their charitable giving… For instance, individuals who take regular, taxable distributions from their IRAs and then donate all or a part of that distribution to a qualified charitable organization may be eligible to deduct the amount of their charitable contribution on their tax returns if they itemize their deductions in the year the contribution was made.

Due to the arduous rules and regulations, nuances of your situation, and general complexity that goes along with making these decisions, it’s always prudent to work with a qualified financial and tax professional to evaluate your available options and identify strategies that best fit your overall situation.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.7 billion.

Overview