With the start of the new year, comes new planning opportunities to those in retirement, specifically those age 72 and older, who must plan for their required minimum distributions. If you give to any charity (that is a qualified 501(c)(3) organization) throughout the year, there’s a way for you to save on taxes and keep more of your money going to the things you want it to go to.
What is it?
A Qualified Charitable Distribution (QCD) allows those taking their required minimum distributions from their retirement accounts to donate up to $100,000 of their required minimum distribution to qualified charitable organizations each year.
Who is it for?
The QCD applies to anyone currently taking their required minimum distributions from retirement accounts (typically Traditional IRAs, 401(k), 403(b), 457). Currently, you must take required minimum distributions starting in the year you turn age 72.
Side note: If you are 72 or older, have retirement assets, and unsure of what a required minimum distribution is, then you need to contact an advisor or your investment company!
What are the benefits of QCDs?
- It can fulfill your required minimum distribution out of your retirement accounts.
- It will reduce your taxes since you are not taxed on the amount given as a QCD.
- It benefits your favorite charities.
Why is this better than just donating directly to the charity?
If you receive the distribution directly and then write a check to the charity, you will likely realize no tax benefit for the charitable donation. This is because current tax law eliminates the need for many to itemize deductions at tax filing.
Whereas a QCD reduces your taxes because you are not receiving the distribution and thus not receiving the taxable income.
If you receive the distribution first, you must pay state and federal taxes on the full amount first, so anything you decide to use as a charitable donation can avoid taxes by making the contribution as a QCD, which allows more of your dollars to go to charity instead of to taxes.
How do I make a QCD?
You will need to work with your IRA custodian to distribute the specified amount directly to the qualified 501(c)(3) organization instead of distributing the money to you. This is usually accomplished by completing a distribution form and you will likely need the following information from the charity:
- How to make the check payable
- Address to mail the check directly to the charity
- Tax Identification Number of the charity
Is there anything else I should know?
- Your QCD does not have to be your full required distribution amount. You can choose an exact amount for the QCD sent directly to your specified charity, then choose to receive the balance of your required distribution separately, which will be taxable income.
- Your QCD can be greater than your required distribution amount (up to $100,000).
- The funds must be transferred directly from your IRA custodian to the charity. If the distribution is received by you first before going to the charity, it will not count as a QCD and will be taxable to you.
- You will still receive Form 1099-R from your IRA custodian indicating your distribution as a normal distribution which is taxable. To offset this, be sure to receive written confirmation from the qualified charity confirming receipt of the QCD. You will want to retain this for your tax records and be sure to communicate this to your tax professional.
- If you have questions whether making a QCD is right for you, please consult your tax professional.
If you are charitably inclined and interested in maximizing every hard-earned dollar that you’ve saved for retirement, then making annual Qualified Charitable Distributions can be a great solution.
If you have any other questions, or would like some assistance with a QCD, feel free to email me at Christopher.Hull@CeteraInvestors.com or call me at 716-707-1818.
Please note that neither Cetera nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney.