Qualified Charitable Distributions: Charitable Giving Through Your IRA
Published on December 8, 2022
Holiday time means receiving numerous appeals for charitable donations before the end of the year. Taxpayers often hurry to get their year-end checks or online donations transacted before December 31 so they can take the deduction on this year’s taxes.
Rather than write out a check, did you know you can use your Traditional IRA (or other tax-deferred account) as the source for making these donations? This is done via a qualified charitable distribution (QCD), for retirement-age taxpayers.
There are good tax-related reasons to do a QCD, so the charitable donation has double benefits to the account owner and the charity that receives the funds.
What is a qualified charitable distribution?
For people or couples who do not yet need the income from their mandatory required minimum distributions (which must start at age 72), they may use the QCD strategy, also called a charitable IRA rollover.
This QCD strategy enables charity-minded individuals to send up to $100,000 a year from their tax-deferred IRA to an operating charity (or qualifying public charity) as defined by the IRS in IRC section 170(b)(1)(A). The amount may represent all, a portion of, or more than their annual required minimum distribution (RMD). Account owners who are eligible to start taking RMDs may do this.
Why take a QCD?
Taking required minimum distributions from one’s IRA increases your taxable income (the withdrawals are subject to ordinary income tax). In some cases, this additional income may push the taxpayer into a higher tax bracket. This in turn may adversely affect Social Security and Medicare benefits.
Enter, the QCD.
Tax benefits of a QCD
While a qualified charitable distribution is not a tax-deductible contribution, the assets that are rolled over go directly to the charity. This bypasses the IRA owner, who will not have to report the QCD amount as taxable income and therefore, will not owe any taxes on it. Of course, the charity benefits as well with a generous donation.
The QCD is excluded from the donor’s taxable income and the taxpayer’s adjusted gross income is reduced, providing an additional tax benefit.
Do’s and don’ts of a QCD
- The qualified charitable distribution is only available as a rollover from an IRA.
- Regarding other retirement plans, donors can roll assets over into a tax-deferred IRA and then gift those assets to a charity via a QCD.
- They may also name a donor-advised fund account or another public charity as a beneficiary as part of their estate planning.
- Donor-advised funds, supporting organizations, and private foundations are not considered qualifying public charities.
- Although the donor may roll over more than their RMD for a particular tax year, the excess distribution can’t be carried over to cover RMDs in future years.
- The QCD can be made to more than one operating/public qualifying charity.
- Organizations that qualify for public charity status include churches, schools, hospitals, medical research organizations, publicly supported organizations that receive a specified portion of their total support from public sources, and certain supporting organizations. Check with your trusted advisor about the status of a charity you wish to support with a QCD before sending instructions to your retirement plan administrator.
- The donor cannot derive any personal benefit from the charity for making a QCD.
As always, the team at Next Generation recommends you consult with your tax advisor or estate planning professional to make sure the QCD strategy is in your best financial interest. If you have a self-directed IRA with Next Generation, we will execute your instructions regarding the qualified charitable distribution once you have done your due diligence about the charity and your RMD amount.
From all of us at Next Generation, best wishes to you for a joyful holiday season!Back to Blog