Qualified Charitable Distributions
With two months left in the calendar year, it is time for those of us who have yet to take our required minimum distribution (“RMD”) from our individual retirement account (“IRA”) to do so. If you find yourself in the fortunate position of having to take your RMD, but not needing some or all of it, you may want to consider donating some or all of your RMD to a charity. A contribution of this type is referred to as a qualified charitable distribution (“QCD”) and, if made, satisfies your RMD requirement for the year up to the amount of the QCD. More specifically, a qualified charitable distribution allows individuals age 70½ and older to distribute up to $100,000 in a given taxable year from their IRA to a charity or charities and have the amount so distributed excluded from their income. The beginning age for RMD’s is now 72, but QCD’s can still begin at 70 ½. Be careful though as a QCD can only go to a public charity – it does not include distributions to donor advised funds or other types of charities. Nor does it include distributions from employer-sponsored retirement plans, and in certain situations not from Simple IRAs and simplified employee pensions.
Importantly, QCDs offer advantages over taking a taxable distribution from an IRA and then contributing the proceeds from that distribution to a public charity. That is because IRA distributions are included in your adjusted gross income which can result in:
- An increase in the amount of your Social Security benefits being taxed;
- An increase in Medicare insurance premiums; or,
- Triggering the net investment income tax.
QCDs avoid these potential pitfalls. Not to mention that many people these days get no benefit from itemized deductions because the standard deduction amounts are so high. Using this strategy, those same individuals can take the standard deduction, plus they get to exclude some or all their IRA distribution from income.
To qualify as a QCD, the distribution must be made in one of two ways: (i) the distribution can be made directly from the IRA custodian to the charity; or (ii) the custodian can give you the check made payable to the charity for you to deliver to the charity. A distribution will not qualify if the IRA custodian transfers money first to the IRA owner and then the IRA owner writes a check to the charity for the amount of the distribution.
Overall, a QCD makes it easier and more tax efficient for those over the age of 70 ½ who are charitable inclined to make charitable gifts.