Qualified Charitable Distributions or QCDs can be one of the most tax-efficient ways to give money to charity. An IRA owner can donate up to $100,000 per calendar year to charities directly from their IRA. For those who are RMD age, QCDs count toward satisfying your Required Minimum Distribution (RMD).
So, what is a QCD, and why should you consider making one over other cash donations? As mentioned above, a QCD is a distribution direct from your IRA sent straight to a charity. The income from this distribution will be excluded from your taxable income if a few conditions are met. For example, let’s use someone with a $25,000 RMD who desires to donate $10,000 to charity. If they take the $25,000 RMD and withhold 20% for taxes, they would have $20,000 in their bank account. After the $10,000 donation, they would have $10,000 left for their spending. If this same person utilized a $10,000 QCD, they would only be required to pay taxes on a $15,000 distribution. At the same 20% tax rate, that leaves $12,000 for their spending needs.
Before you start executing your own QCDs, you should know there are a few simple rules to follow:
The first is that you must be 70 ½ before you can make a QCD. There is no exception to this rule as of the date this article is written.
The second rule is that a QCD must be distributed directly to the qualifying charity from your IRA. If a deposit is made to your personal bank account or any other account outside an IRA, it will not count as a QCD. In addition, accounts like 401(k)s, 403(b)s, or 457s do not qualify for QCDs. Only IRA-based accounts like a Traditional IRA, Rollover IRA, Inherited IRA, inactive SEP IRA, or inactive SIMPLE IRA are eligible for QCDs. It is doubtful you would receive any benefit from using a ROTH IRA for a QCD.
Third, the funds must go to a 501(c)(3) organization. The IRS has a search tool to verify that an organization is a qualified charity: https://www.irs.gov/charities-non-profits/tax-exempt-organization-search. Be sure to receive a receipt from the charity to provide your tax preparer. Donor-advised funds, private foundations, and supporting organizations are not eligible for QCDs.
Finally, the QCDs must be complete by December 31st of the current year to count. If the funds or checks are not cleared by the end of the year, the QCD will not count for the current year. However, all is not lost; the QCD will apply to the following year’s limits.
Contact your advisory team to see if a QCD makes sense for your financial goals and discuss the mechanics. We always recommend reviewing tax strategies with your tax advisor.
Nic Cohen, CFP®
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Certified Financial Planner (CFP®) is licensed by the CFP® Board to use the CFP® mark. CFP® certification requirements include: Bachelor’s degree from an accredited college or university, completion of the financial planning education requirements set by the CFP® Board (www.cfp.net), successful completion of the CFP® Certification Exam, comprised of two three-hour sessions, experience requirement: 6,000 hours of professional experience related to the financial planning process, or 4,000 hours of Apprenticeship experience that meets additional requirements, successfully pass the Candidate Fitness Standards and background check, agree annually to be bound by CFP® Board’s Standards of Professional Conduct, and complete 30 hours of continuing education every two years, including two hours on the Code of Ethics and Standards of Professional Conduct.