What if you could lower your tax bill and make a difference in the world at the same time? That’s exactly what a Qualified Charitable Distribution (QCD) allows you to do.
What is a Qualified Charitable Distribution (QCD)?
For retirees age 70½ and older, making a QCD can turn a taxable (and sometimes mandatory) withdrawal into a meaningful gift, helping charities thrive while keeping more money out of the IRS’s reach.
People who have stashed savings into IRA, 401(K), SEP, and other tax-deferred retirement accounts over the years reach a point where they must start withdrawing the funds, whether or not they need or want the money. That’s the RMD. It kicks in at age 73 (age 75 for people born after 1959), and the withdrawals are taxable as ordinary income.
However, a Qualified Charitable Distribution (QCD) can reduce or even eliminate the tax on RMD withdrawals.
Who Can Benefit from a QCD?
A QCD lets people over 70½ donate up to a total of $108,000 to qualifying charities directly from an Individual Retirement Account (IRA), instead of taking the distributions for their personal use or investment. This limit is per person, so married taxpayers can each donate up to $108,000 to qualifying charities.
By reducing your Adjusted Gross Income, donors also may avoid being pushed into higher tax brackets, prevent the phase-out of other tax deductions, and avoid Medicare premium surcharges (IRMAA). (You can learn more about how IRMAA is calculated in this article).
IRS Rules and Guidelines for QCDs
All of this is a fairly complex process and must be done in the right order to qualify for the tax benefits.
It’s critically important that the money you are contributing through a QCD be made directly to a qualified charity. Your IRA custodian (i.e., Charles Schwab or Vanguard) can send an electronic transfer of funds or a check directly to the charity, or they can send a check made payable to the charity to your address, and you deliver the check to the charity, but the check must never be made payable to you. You cannot make the withdrawal and then donate the funds yourself if you want the transaction to be recorded as a QCD.
What Counts as a Qualified Charity?
Qualified organizations that are eligible to receive QCDs are U.S.-based, 501(c)(3) non-profit organizations. You can use the IRS Tax Exempt Organization Search tool at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search. It is important to note that QCDs cannot be made to private foundations, donor-advised funds, or supporting organizations. A QCD cannot be made to an otherwise qualified organization if the donor receives something of value in return for the QCD.
More Alphabet Soup
Charities and colleges have long sought to get wealthy donors to set up gift annuities that give them a lifetime stream of income.
You can use your QCD to establish a Charitable Gift Annuity (CGA). That is a contract between you, the donor, and a charity. You make a gift of cash or assets, and, in return, get a lifetime stream of fixed payments.
It’s a once-in-a-lifetime maneuver with a maximum contribution this year of $54,000, indexed for inflation in future years. If you do not fund the CGA to the maximum amount, you cannot carry over or roll over the funds into future years.
It’s worth noting that the payments you receive in future years are taxed as ordinary income. Also, only the donor and/or their spouse can be recipients of the annuity payments. The payout rate is based on your age, life expectancy, and whether there are one or two beneficiaries.
CGAs funded with QCDs must begin payouts within a year of funding them, and any money left over when the donor(s) die goes to the charity. It is not considered part of your estate.
These can be complex transactions, so be sure to consult with an EKS financial adviser before getting involved.
Also note that the annuity is only as safe as the charity is sound.
Are you wondering how much income you can expect to receive? Not enough to take two weeks in Paris, but enough to help pay some bills. A 75-year-old donor can expect a payout rate of about 7%. A $50,000 donation would throw off about $3,500 each year, whether you live to 76 or 106.
Important Tax Considerations for QCDs
- You do not need to itemize your deductions to benefit from a QCD. Actually, those taxpayers who do not itemize stand to benefit even more than those taxpayers who do itemize their deductions.
- While a QCD is a tax-free transfer, you will still receive an IRS tax form (1099-R) to reflect the RMD withdrawal. The IRS has redesigned Form 1099-R so that the form will now indicate whether any of the distributions taken from the account qualify as a QCD. If you take a distribution from the IRA and also make a QCD, it is unclear as of now if two 1099-R forms will be generated or not. Therefore, it is important to notify your tax preparer at tax time that you made a QCD, as well as sharing the dollar amount, so it is reported correctly on your income tax return.
- A QCD can only be done for the calendar year in which it is made. It must be completed by December 31st. If you miss the deadline, the contribution will count towards your taxes for the following year.
- QCDs can be made from a Roth IRA. However, this is not the best type of account to use since distributions from a Roth IRA are tax-free.
- While some states follow federal law, not all states do. This means that in states that do not follow Federal law, QCDs could be taxable for state tax purposes, even if not taxable for Federal tax purposes.
Aligning Your Financial Plan with Your Values
Qualified Charitable Distributions can be a powerful way to align your financial plan with your personal values. By turning required withdrawals into meaningful gifts, you can reduce your tax burden and support causes that matter most to you. If you’re considering a QCD or Charitable Gift Annuity, we encourage you to reach out — we’ll walk you through the rules, deadlines, and opportunities so you can give confidently and strategically.
