A qualified charitable deduction (QCD) is an allowed distribution from an IRA account to a charity without any taxable event to the IRA owner. [For example, let’s say an IRA owner has an RMD in the amount of $20,000. If the owner doesn’t need the money and doesn't want to pay taxes on the RMD, they can simply do a QCD and have the IRA custodian make out a check payable to a qualified charity of their choice. The $20,000 check would be made directly to the organization and would not result in a taxable event to the IRA owner.
Because of the huge tax savings to an IRA owner, there are very strict rules that must be followed to ensure that the gift to charity remains a tax-free event to the IRA owner.
See below some important rules you will want to follow to make a QCD seamless:
- Age 70.5 - The IRA owner must be 70.5 years old and eligible to do a QCD. When the QCD occurs, the owner must be 70.5 years old or older on that day. Note: It is not sufficient that the client will turn 70.5 later in the year.
- $100,000 Annual Limit – You are eligible to make a QCD election of up to $100,000 per person, per year. For married couples, each spouse must have their own IRA to make the distribution. If more than $100,000 is withdrawn from an IRA and contributed to a charity, they cannot carry over the excess to a future year.
- Eligible Retirement Accounts – QCDs are allowed from traditional IRA and Roth IRA accounts. (However, it is more advantageous to use a traditional IRA account.) QCDs are allowed from SEP and SIMPLE IRA accounts where contributions into the accounts have been stopped. QCDs are not eligible for employer-sponsored plans like 401(k)s and 403(b)s; must be IRA based.
- Required Minimum Distribution (RMD) Can be Satisfied – A QCD can satisfy an IRA owner’s RMD for the current calendar year. If the RMD amount is over $100,000 then any amount over the annual limit of $100,000 will be a taxable event to the IRA owner.
- Only Taxable Amounts – QCDs only apply to taxable amounts. However, it is unlikely that Roth IRA funds would be eligible as they are after-tax funds. The only way a Roth would qualify is if the earnings were sent as a QCD from a Roth that was less than five years old.
- Must be a Direct Transfer – When making the QCD election, the check must be made directly to the charitable institution. For example, if an IRA owner takes a withdrawal of $50,000 and deposits the assets into their banking account and then immediately writes a check to a qualified charity for $50,000 this would be considered an ineligible QCD and would be taxed. The rules state that the check coming from the IRA account must already be made to the qualified charity of choice. There are no exceptions to this rule. The check has to be made out directly to the charitable organization.
- Beneficiaries of IRAs Can Do QCDs Too – If you are a beneficiary of an IRA that you inherited you too can make a QCD. However, the beneficiary must be 70.5 years old at the time the QCD is made, just like that of the original IRA owner.
QCDs are a great way to make a gift to a favorite charity without incurring any taxable event to the IRA owner. Just make sure you are comfortable with the rules that go along with making a QCD. Having a trusted financial advisor to help navigate through all the rules would be ideal in this situation. Let us know if MSMF can help you steer in the right direction.
Cetera Financial Specialists does not offer tax or legal advice.
Cody Reading is a financial advisor at MSMF Wealth Management. He specializes in retirement planning strategies and believes that the best part of his job is helping clients reach their financial objectives. In his spare time, Cody enjoys hiking, cooking, traveling, spending time with his family, and attending Cardinals and Blues games.