Enjoy tax-free IRA distributions with the impact of QCDs
For decades you’ve given generously to your favorite charities while faithfully saving into your 401k or IRA. So, it’s normal to experience some whiplash when a financial advisor tells you it’d be smarter to start giving to charities from your IRA after you turn 70 ½! This is a strategic opportunity for generous retirees.
As an advisor that helps clients give most effectively for their situation, I’ve been recommending the Qualified Charitable Distribution (QCD) opportunity since 2006, when it first appeared in the Pension Protection Act. It allows IRA owners over age 70 ½ to send charitable donations directly to their favorite 501(c)(3) organizations as a tax-free transfer.
Why is that important? Because it’s one of the few ways that you can get money out of an IRA on a tax-free basis during your lifetime and satisfy your Required Minimum Distributions (RMDs) as well!
Most retirees enjoy using the Standard Deduction these days, so the tax benefit of giving from their checkbook has been greatly diminished. If you’re already giving faithfully to charity, why not let the IRA do the heavy lifting for you?
Here’s a checklist for how to do a QCD:
- Ensure you have a Traditional or Rollover IRA. Sorry, this opportunity isn’t available for 401k’s, 403b’s, Inherited IRA’s or Non-Qualified Annuities. Your financial advisor or financial institution should be able to help you verify this, along with confirming that they can process this type of distribution.
- Make sure that the charity you have in mind is a 501(c)(3) nonprofit and eligible to receive tax-deductible contributions. These particular IRA donations won’t be tax deductible to you, but the charity must be a 501(c)(3) nonetheless.
- The maximum QCD amount is $100,000/year per IRA owner, but you could do as little as $100. In fact, any QCD amount counts toward your Required Minimum Distribution, which now starts at age 73. So, our retired clients commonly satisfy their RMD each year by doing QCDs to various charities.
- Work with your advisor or financial institution to complete the necessary paperwork so that your specified amount will go directly from the IRA to the qualified charitable organization. DO NOT have the check sent to you. Then, keep records of your QCD transactions and ensure you receive acknowledgment from each charity for your donation.
- As you file your taxes each year, you will subtract the total amount of QCD’s from your 1099-R, which comes from the IRA custodian. They will NOT track this for you, nor do they reduce the taxable distribution amount on your behalf. You have to coordinate with your tax preparer to reflect the right amount of taxable distributions vs QCDs on your tax return, which is why getting a written acknowledgement of these IRA gifts is so important.
Here’s a quick example:
Joe has given faithfully to his church in the amount of $12,000/year via checkbook or appreciated stocks for many years. Now that he’s turning 73, he will have an RMD from his IRA in the amount of $17,500. Instead of writing a check to the church, he does a tax-free transfer of $12,000 directly to them through the QCD method. Then, he only has to take out the remaining $5,500 as a taxable distribution before December 31st to satisfy the rest of his RMD. When it comes time to file his taxes, he will only have to report the $5,500 as income on his tax return. Down the road, he could always increase his giving to match his RMD as desired, all the way up to $100,000/year.
As always, consult with your financial advisor or tax consultant when considering this particular giving strategy. At Sound Stewardship, we are well-versed in how to help you process QCDs in the most efficient way possible, regardless of which IRA custodian you are using. If you have a question or need assistance with how to do this correctly, reach out to a Wealth Advisor.
< Back to Updates
