Many investors are unaware that you can use retirement assets to support the charities of your choice while avoiding taxes at the same time.
A qualified charitable distribution (QCD) is a direct transfer of money from an individual retirement account (IRA) to an eligible charitable organization.
Unlike regular withdrawals from your IRA, QCDs are excluded from taxable income. And unlike other charitable contributions, you don’t need to itemize them when filing your tax return. The 2017 tax law changes made it harder for many to use charitable giving as part of their tax strategy—the higher standard deduction means you need a higher dollar value in itemized deductions (charitable gifts among them) for an itemized return to offer any tax savings. If you are able to make them, the tax treatment of QCDs lets you enjoy the higher standard deduction while using the QCD to carry out your charitable giving.
Before making a QCD it’s important to understand the rules and restrictions:
- Your Age. You must be at least 70½-years-old to make a qualified charitable distribution. Also, a QCD lowers the tax hit on your mandatory annual cash-out from an IRA after age 70½. (Pending legislation may hike the required minimum distribution (RMD) age limit to 72-years-old; we’ll keep you posted.)
- Direct Transfer. When making a QCD, the money needs to go directly from your IRA to your chosen, qualified charity. This can happen electronically, by mail or your IRA custodian can send a check payable to the charity to you so that you can personally deliver the donation.
- Charity Eligibility. The charity must be approved by the IRS for you to get the tax benefit. Approved charities include 501(c)(3) organizations and houses of worship. Note: Donor-advised funds are not eligible to receive QCDs. The IRS provides a searchable database here.
- Distribution Limits. For 2019, the maximum amount an individual can count as a QCD is $100,000. If you are married and file a joint tax return, each spouse can donate $100,000 so long as they have individual IRA accounts to draw from. This limit can be reached by donating to as many charities as you wish.
- IRA Rules. QCD rules apply to traditional IRAs and inherited IRAs. Active SEP and SIMPLE IRAs do not qualify. While you can make a QCD from a Roth IRA, it doesn’t come with any tax advantages. (Distributions from a Roth are already tax-free.)
Keep in mind that tax laws are amended from time-to-time so the rules are subject to change. And we know it’s a lot to take in—we’re always happy to help you think it through. Please contact us at (800) 492-6868 if you have any questions about charitable giving.
As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.