WHEN SHOULD I USE A QUALIFIED CHARITABLE DISTRIBUTION FROM MY IRA?
If you are charitably inclined, have an IRA, and are 70.5 or older, you should give the Qualified Charitable Distribution (QCD) strategy strong consideration. The QCD is a means to satisfy your required minimum distribution (RMD) and lower your tax bill. Here’s how it works:
Assume Elizabeth is a 72 year-old with an RMD from her IRA of $15,000 this year. Instead of taking the money herself, she chooses to send that $15,000 directly to a charity. This satisfies her RMD and Elizabeth won’t have to include the $15,000 in her gross income.
EXCLUDING THE RMD FROM GROSS INCOME CAN HAVE MULTIPLE BENEFITS:
- Lowers income tax
- If on Medicare, the QCD may help keep modified adjusted gross income below thresholds that require increased monthly premiums
- Reduces income that may be subject to the net investment income tax
- May decrease the amount of Social Security benefits subject to income tax
- Helps eligibility for certain deductions and credits
THERE ARE A FEW RULES FOR USING THE QCD, TO ENSURE THE RMD IS MET AND NOT TREATED AS TAXABLE INCOME:
- You must be at least 70.5 years old at the time the distribution from the IRA to charity is processed
- The distribution must be made out of the IRA within the same year that your RMD would normally be taken (by December 31)
- IRA Distribution checks cannot be made payable to you, checks must be payable to a charity
- The maximum annual amount that can qualify for the QCD is $100,000 per person
- Donor Advised Funds and private foundations are not eligible to receive QCDs
- QCDs cannot be made from employer sponsored retirement plans such as 401(k)s
You do not need to send your entire RMD to charity in order to use the QCD. If your RMD is $15,000 you could send $1,000 to charities and would be taxed only on the remaining RMD of $14,000. You can also use the QCD for more than your RMD if you wish, but none of the additional amount may count toward satisfying RMDs in future years.
The QCD is not new, but does have new implications following changes with the Tax Cuts and Jobs Act (TCJA). The TCJA increased the standard deduction (for 2018: $12,000 for single filers, $24,000 if married filing jointly) and eliminated a number of allowable deductions. As a result, many filers who previously itemized will claim the higher standard deduction, and won’t be allowed to itemize charitable donations. For these persons who are also 70.5 or older, QCDs remain an option to still get a tax break for charitable giving.
While beneficial, the QCD is not a “one size fits all” solution for tax planning and charitable giving. Some persons may do well by donating appreciated securities or using a bunching strategy in order to alternate between the standard deduction and itemized deductions. To get the best outcome in maximizing your charitable gifts and income tax benefits, it is important to discuss your plans with your advisors.