Qualified Charitable Distributions (QCDs) provide individuals aged 70½ or older with a tax-efficient way to support charitable organizations while potentially fulfilling Required Minimum Distribution (RMD) obligations. Here is an overview of how QCDs work, their benefits, and key considerations for integrating them into your financial plan.

What is a Qualified Charitable Distribution?

A QCD allows individuals to transfer funds directly from their Individual Retirement Account (IRA) to a qualified charitable organization. This transfer can count toward the individual’s annual RMD without being included in their taxable income.

• Fact: The annual QCD limit is $100,000 per individual. Amounts transferred as QCDs are excluded from taxable income, which may help individuals who do not itemize deductions.

To qualify, the distribution must go directly from the IRA custodian to the charity, and the organization must meet IRS requirements as a 501(c)(3) entity.

Eligibility and Rules

Several requirements govern QCDs:

• Age: You must be at least 70½ years old at the time of the distribution.
• Account Type: QCDs can only be made from traditional IRAs or inherited IRAs. Employer-sponsored plans like 401(k)s or 403(b)s are not eligible.
• Charities: Only organizations that qualify as 501(c)(3) charities can receive QCDs. Private foundations, donor-advised funds, and certain other entities are excluded.
• Tip: Before initiating a QCD, confirm that the charity meets IRS qualifications.

Tax Advantages of QCDs

One primary benefit of QCDs is that the distributed amount is excluded from taxable income. This may reduce the likelihood of crossing income thresholds that could increase Medicare premiums or taxes on Social Security benefits. For those who take the standard deduction, QCDs provide a tax-efficient way to achieve charitable goals without requiring itemized deductions.

• Fact: The 2024 standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly, making it challenging for many taxpayers to itemize. QCDs offer an alternative approach to tax-efficient giving.

QCDs and Required Minimum Distributions (RMDs)

If you are required to take RMDs, a QCD may count toward fulfilling that obligation. This can benefit individuals looking to reduce their taxable income while supporting charitable causes.

• Example: If your RMD for the year is $20,000 and you make a $15,000 QCD, only $5,000 of your RMD would be included in taxable income.

It’s important to note that QCDs exceeding the annual RMD cannot be carried over to the following year, and amounts excluded from taxable income cannot also be claimed as a charitable deduction.

Executing a QCD

Follow these steps to make a QCD:

1. Verify Eligibility: Ensure you meet the age requirement and that the charity qualifies under IRS rules.
2. Work with Your IRA Custodian: Contact your custodian to initiate the transfer. The funds must go directly from the IRA to the charity.
3. Keep Records: Obtain documentation from the charity for tax reporting purposes.

• Tip: Start the process early to avoid delays, especially if you intend to meet RMD deadlines.

Additional Considerations

• Annual Limit: The $100,000 QCD limit applies per individual. Married couples can each make QCDs up to this amount.

For those incorporating QCDs into their charitable giving strategy, evaluating cash flow needs and long-term financial goals is essential.

Conclusion

Qualified Charitable Distributions provide a flexible and tax-efficient way to achieve philanthropic goals while addressing RMD requirements. By planning carefully and understanding the rules, you may integrate QCDs into your overall financial strategy effectively.

If you’d like to explore QCDs further or determine if they align with your financial goals, feel free to contact us. We’re here to assist with your planning needs.

For additional insight, read Wealth on Purpose Chapter 6 by Bryan Ballentine.

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Sources:

• IRS Publication 590-B: Distributions from IRAs
• Fidelity Charitable: QCD Guide
• Tax Policy Center: Charitable Giving
• National Association of Tax Professionals: QCD Guidelines

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