A Qualified Charitable Distribution (QCD) is a tax advantaged way for Traditional, Rollover and, in some cases, Simple and SEP IRA owners age 70 ½ and older, who take the standard deduction on their tax return (as opposed to itemizing), to make charitable contributions and avoid ordinary income taxes on the entire amount (up to $100k per IRA owner) distributed directly from the IRA to charity.
IRA owners must begin taking Required Minimum Distributions (RMDs) once they reach the age of 70 ½, or age 72 for those turning 70 ½ on January 1, 2020 or later. These amounts will be determined by IRS life expectancy tables and will be taxed at the owner’s ordinary income tax rate. This is an obvious disadvantage, being that there is a minimum amount you must take. This amount increases on a percentage basis annually. For large account balances the tax hit could be significant.
But, fear not! The IRS allows RMDs to be partially, or even completely satisfied through the use of the Qualified Charitable Distribution.
Assuming you are charitably inclined, you may combat some or all of the tax hit by electing to make a QCD. How’s this work? It’s simple. First, you must be age 70 ½ and you must be the owner of the IRA. Second, A distribution form must be submitted to the IRA custodian requesting that the check be made payable directly to the qualified charity. Third, be sure that you do not withhold any taxes, as all of the contribution must be directed to the charity to qualify. Lastly, have the check sent directly to the charity, or to the IRA owner to be passed along to the charity.
But beware, the IRS considers the RMD to be satisfied by the first distributions from the IRA for the year. So if you intend to take advantage of the QCD be sure to make it your first distribution of the year, or multiple distributions that, combined, do not exceed the RMD amount. Why does this matter? The whole point of the QCD is to satisfy your RMD and, at the same time, reduce the amount of income reported on your tax return. So, if you’ve already satisfied the year’s RMD any remaining charitable contributions would not qualify for QCD status.
A final note… just because the QCD exists, doesn’t necessarily mean it’s appropriate for your situation. Be sure to consult with your tax advisor to determine if it’s the best strategy for you. Additionally, if you are planning to use the QCD you are responsible for making the election and filing the appropriate forms to the IRS with your annual tax return. Don’t assume your tax advisor knows you made the QCD. In fact, they won’t, unless you tell them.