Part of planning for retirement is considering your IRA distributions and management. One tool that can offer significant savings and tax benefits while allowing you to do good is a qualified charitable distribution (QCD), a direct transfer from an IRA account made payable to a qualified 501(c)(3) charity.
Keep reading for a breakdown of what a QCD is, eligibility requirements, and how it works!
What Benefits Do QCDs Offer?
In addition to giving back to a charity, a QCD allows investors to:
- Exclude the amount donated from their taxable income.
- Claim the QCD benefit without having to itemize their taxes.
- Reduce their effective tax rate.
These QCD benefits far outweigh contributing to a charity and only getting a tax deduction based on your income tax bracket—which also requires you to itemize your taxes!
What is an RMD? This is the minimum annual amount you must withdraw from many IRAs (except Roth IRAs).
Who Can Make QCDs?
Eligible investors must be at least 70.5 years or older to make a QCD. Qualified IRAs include:
- Traditional
- Rollover
- Inherited
- Simplified Employee Pension Plans (SEPs)*
- Savings Incentive Match Plan for Employees (SIMPLE)*
You can contact your Registered Investment Advisor or the custodian directly, who will then process the transaction and report it on your Form 1099-R to inform the IRS what the funds were used for on your behalf.
Qualified individuals have a maximum annual QCD limit of $100,000, which includes your total QCDs donated to one or more charities that year. The limit for married couples over the age of 70.5 who file jointly is $200,000 ($100,000 for each spouse).
There is no minimum on QCDs, and you can choose multiple charities and make several donations throughout the year as long as the total amount is below $100,000 per person.
*SEP and SIMPLE plans are eligible as long as they are not ongoing, meaning you haven’t contributed to the plan in the year when you make the QCD.
How Do QCDs Work?
For a QCD to count toward your current year’s Required Minimum Distribution (RMD), you must withdraw the funds from your IRA by your RMD deadline, typically December 31st of that year.
Investors should keep in mind that:
- A QCD is not subject to tax withholding.
- Any contributions made to a charity outside of the QCD will not count toward the $100,000 maximum, nor will they have the same tax benefits.
- From a tax benefit perspective, a taxpayer would be better off utilizing the entire $100,000 QCD maximum first.
- Certain charities, such as private foundations, may not be eligible. Always consult your tax advisor to determine if your IRA and charity qualify for QCDs first.
Final Thoughts on QCDs
A QCD can be a powerful tool for savvy investors who want to positively impact a good cause and their retirement funds. You’ll enjoy helping organizations that are meaningful to you while lowering your taxable income and counting toward your RMDs!
If you’re ready to assess your IRA strategy and implement QCDs into your plan, contact the Carlson Investments team today to get started. We’ll help you optimize your wealth with your long-term goals in mind.
*Carlson is not a tax advisor and we recommend speaking to your tax advisor when considering tax strategies.
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