Giving With Benefits: QCD Part 1
By Gary Silverman, CFP®
Are you 70-1/2 or older this year? Last October, I wrote an article about using Qualified Charitable Distributions (QCDs) to help maximize charitable deductions on your tax return. Today I want to give you some details about how it works in case you can use it this year, or if you’d like to get ready for next year.
The QCD is a distribution from an IRA to a charity that allows that distribution to be tax-free. This is a strategy you’d use for a Traditional IRA, since Roth IRA distributions are already tax-free. You can use this for both your own Traditional IRA along with any that you have inherited (called Beneficiary IRAs).
To do a QCD, you must be at least 70-1/2 years old the day you do the distribution. If your 70th birthday was June 5th of this year, you’d need to wait until December 5th to make the QCD.
Make sure you DO NOT send your IRA distribution to your checking account and write your charity a check from there. For the distribution to be considered a QCD the money must go directly from your IRA custodian to the charity. There is one caveat: Some custodians will write the check to the charity and send it to you so that you are the one that hands it to the charity. This is okay assuming that the check was written payable to the charity.
A neat feature of the QCD is that it can count as your Required Minimum Distribution (RMD). That’s the amount the IRS makes you take out of your Traditional IRA every year when you turn 70-1/2. Let’s look at two scenarios. In each we’ll assume you are 74 years old, have an IRA, and your RMD this year is $5000.
In the first scenario, you want to give $3000 to your favorite charity. You tell your IRA custodian to make a QCD to that charity. That $3000 will not be a taxable distribution and will count as part of your RMD. You’ll still need to pull the other $2000 out during the year to satisfy the $5000 RMD total.
In the second scenario, you want to give $10,000 to your favorite charity. Again, you tell your IRA custodian to send the money to the charity. In this case you have satisfied the full $5000 RMD and none of the $10,000 that’s left your IRA will be taxable.
There is a limit to this generosity. The maximum you can do a QCD for is $100,000 per person. That isn’t to say that a couple can’t give $200,000, but it must be taken from their respective IRAs. If one only has a $50,000 IRA and the other’s is worth millions, they are limited to $50,000 + $100,000 that year.
If you meet the qualifications (are charitably inclined, have a Traditional IRA, and are over 70-1/2), the QCD is an excellent source for giving.
P.S.: Your QCD contribution can’t result in your getting any gift in return. This means you’ll have to do without the coffee mug you may have received if you’d donated directly from your wallet. The warm, fuzzy feeling of helping others still comes with no strings attached.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.