By: John Bochniak
As one reaches past age 70, a lifetime of wise moves has been lived. We write today to explain another wise move for our senior clients —that of addressing your annual giving intentions by donating from your Individual Retirement Account through what is known as a Qualified Charitable Distribution, or “QCD” for short.
Exercising a QCD not only allows you to address your giving desires but doing so can also create a very nice tax benefit. The tax benefit arises from the fact that the IRA distribution used to fund the QCD gift is totally excluded from your income. This income exclusion is a lot better than the tax treatment of a normal IRA distribution. A normal distribution is recognized as ordinary income and taxed federally at 10 – 37% depending on your income.
This tax benefit is especially nice now that we live in the age of the high standard deduction as many seniors find themselves no longer itemizing their charitable donations on schedule A. So, in essence, a QCD is a way to realize tax savings from a gift you can’t itemize on Schedule A – a wise move indeed!
It gets better as a QCD can count as part of your required minimum distribution (“RMD”) for the year. In fact, for many, the QCD can cover the full RMD keeping you in compliance with the annual distributive rules, yet completely avoiding the tax impact of the distribution requirement.
There are some important rules governing this strategy. Be aware of the following:
- You must be age 70.5 or older at the time of the distribution.
- The distribution must come from a traditional (or rollover) IRA. Distributions from SEP and SIMPLE IRA’s do not qualify.
- You may only give up to $100,000 each year this way.
- The gift must go straight from your IRA to the qualified charity
- A qualified charity DOES NOT include private foundations nor donor advised funds.
Aside from the rules, it is key to understand how to report the QCD on your tax return. As is customary, the distribution from the IRA will be reported to you on a 1099-R from the custodian of the IRA. It then becomes your responsibility to properly disclose the QCD on the tax return to bring about the tax benefit (or, even simpler, just let your tax preparer know one was made during the year). As a helpful reporting hint, and as alluded to earlier, a QCD is not to be itemized as a charitable gift on Schedule A.
If you are age 70 or older, or approaching that age, and would like to understand the mechanics of this wise move and see if it plays well with your financial plan, please let us know. We look forward to discussing the strategy with you.