Contributed by: Josh Bitel, CFP®
The Qualified Charitable Distribution (QCD) can be a powerful and tax-efficient way to achieve one’s philanthropic goals. This strategy has become much more popular under the new tax laws.
The QCD, which applies only if you’re at least 70 ½ years old, essentially allows you to directly donate your entire Required Minimum Distribution (RMD) to a charity. Normally, any distribution from an IRA is considered ordinary income from a tax perspective; however, when the dollars go directly to a charity or 501(c)3 organization, the distribution from the IRA is considered not taxable.
Let’s Look at an Example
Sandy turned 70 ½ in June 2019, and this is the first year she has to take a Required Minimum Distribution (RMD) from her IRA, which happens to be $25,000. A charitably inclined person, Sandy gifts, on average, nearly $30,000 each year to her church. Because she does not really need the proceeds from her RMD, she can have the $25,000 directly transferred to her church, either by check or electronic deposit. She would then avoid paying tax on the distribution. Since Sandy is in the 24% tax bracket, she saves approximately $6,000 in federal taxes!
Rules to Consider
The QCD and similar strategies have rules and nuances you should keep in mind to ensure proper execution:
Only distributions from IRAs are permitted for the QCD. Simple and SEP IRAs must be “inactive.”
Employer plans such as a 401k, 403b, 457 do not allow for the QCD.
The QCD is permitted within a Roth IRA but would not make sense from a tax perspective, because Roth IRA withdrawals are tax-free by age 70 ½.*
You must be 70 ½ at the time the QCD is processed.
Funds from the QCD must go directly to the charity and cannot go to you first and then out to the charity.
You can give, at most, $100,000 to charity through the QCD in any year, even if this figure exceeds the actual amount of your RMD.
The amount of money saved from being intentional with how you gift funds to charity can potentially keep more money in your pocket, which ultimately means there’s more to give to the organizations you passionately support.
Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.