Imagine this–You have done a great job saving for retirement. You are now in your golden years–and you have amassed true wealth. Maybe, just maybe you have too much money in your 401k or IRA. You have stopped working and the IRS is making you take money out of your accounts because you are age 72. But you don’t want or need the money and every dollar that comes out is taxable…. What do you do?
It’s time to consider a strategy that will help YOU and SOMEONE ELSE. A qualified charitable distribution (QCD) from your IRA!
A QCD is a direct transfer of funds from your IRA, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year. It is the best way to both fund your favorite charity, as well as be tax efficient.
In addition to the benefits of giving to charity, a QCD excludes the amount donated from taxable income, which is unlike regular withdrawals from an IRA. Keeping your taxable income lower may reduce the impact to certain tax credits and deductions, including Social Security and Medicare.
QCD Tax Benefits:
If all requirements are met, the QCD will count toward satisfying your required minimum distribution (RMD) obligation for the year. This is where the more subtle tax benefits of the contribution come into play. If you were to follow the typical procedure — withdrawing the RMD and then writing a check to the charity — the RMD amount would have to be included in your adjusted gross income (AGI) and then claimed as a charitable contribution deduction.
By taking the RMD as a QCD — that is, transferring the RMD, or a portion of it, directly to the charity — the QCD is never included in AGI. Therefore, it is effectively deducted whether or not you itemize your deductions, which may benefit you if you claim the standard deduction. Also, by reducing your AGI, you may reduce the taxable portion of your Social Security benefits, as well as income-related adjustments to Medicare Part B and D premiums.
Rules of the QCD strategy
● Be 70½ or older.
● Transfer no more than $100,000 per year.
● Transfer from an IRA and not an employer-sponsored retirement account.
● Have the funds directly transferred from the IRA to a qualified charity. Generally, a qualified charity is one that is authorized to receive tax-deductible contributions.
● Any amount donated above your RMD does not count toward satisfying a future year’s RMD.
● Funds distributed directly to you, the IRA owner, and which you then give to charity do not qualify as a QCD.
● Under certain circumstances, a QCD may be made from a Roth IRA. Roth IRAs are not subject to RMDs during your lifetime, and distributions are generally tax-free. Consult a tax advisor to determine if making a QCD from a Roth is appropriate for your situation.
We all strive to make more contributions to charity. So much good is done in this world because of the generosity of others. If you are over age 70 and already making chartable donations-consider switching to a QCD to reduce your taxable income today! Or build out your donation plan now so you an reduce your taxable income tomorrow!
For more information on Distributions, visit the links below:
(IRA FAQs – Distributions: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals
(Ten QCD Rules For 2019 You Need To Know): https://www.irahelp.com/slottreport/ten-qcd-rules-2019-you-need-know
