Qualified Charitable Distributions (QCDs): What, When, Why
A Qualified Charitable Distribution (QCD) enables individuals above the age of 70½ to donate up to $100,000 annually to charity from their IRA.
Funds distributed as a QCD can be counted towards the required minimum distribution amount annually. This can be an advantageous strategy for individuals, as it directly reduces one’s ordinary income. With the higher standard deduction ($13,850 for single filers, $27,700 for married filing jointly in 2023) many people are no longer able to itemize charitable donations so the QCD provides an ongoing opportunity to receive a tax benefit for charitable giving.
What qualifies as a qualified charitable distribution from an IRA?
Individuals who are age 70½ or older and have an IRA (eligible accounts types are traditional IRAs, inherited IRAs, and inactive SEP and SIMPLE plans) may be eligible for a QCD, or Qualified Charitable Distribution. QCDs allow individuals to transfer up to $100,000 from their IRA directly to qualified charities without having to pay income taxes on the withdrawal. Married couples with their own IRAs may each make a QCD, allowing an annual transfer to charity of up to $200,000.
QCDs must go directly from the IRA custodian to a qualified charity; if funds are taken out of an IRA before being transferred to a charity, it will not meet QCD requirements and will be subject to taxation.
Additionally, QCDs can be made to any 5013(c) non-profit organization of your choice, but are not eligible to be made towards a donor-advised fund or a private foundation.
Key considerations for qualified charitable distributions
While the recently passed Secure 2.0 Act has pushed back the Required Minimum Distribution age to 73, you can still begin to make qualified charitable distributions beginning at age 70½. This can help reduce your IRA balance which could help lower future RMD amounts. It’s worth noting that QCD amounts made above the RMD amount do not offset future years RMDs.
For tax preparation you should keep an acknowledgement from the charity in your records. Your IRA custodian will provide a 1099-R and mark the gift as a normal distribution, you’ll need to note the charitable amount.
A Qualified Charitable Distribution (QCD) can offer a number of potential advantages for donors. QCDs are particularly suitable for those who:
- Need to take the required minimum distribution but do not require the funds, and would be faced with higher tax liabilities if they took the distribution as income.
- Are seeking to make larger charitable gifts than what would typically be possible with cash or other assets. The usual deduction limit for charitable gifts on tax returns is between 30-60% of the donor’s adjusted gross income; QCDs, however, are exempt from this AGI-based limitation, allowing for more generous donations.
- Are wanting to give directly to a charity, instead of towards a foundation or donor-advised fund.
- Have already identified which charities they intend to support right away with a sizable donation.
When is a qualified charitable distribution a suitable IRA withdrawal strategy?
A Qualified Charitable Distribution (QCD) becomes a suitable IRA withdrawal strategy when an individual aged 70½ or older seeks tax-efficient ways to support charitable causes.
By directly transferring funds from the IRA to eligible charities, the QCD satisfies Required Minimum Distributions (RMDs) without adding to the taxpayer’s taxable income. This strategy is particularly advantageous for retirees who do not need the entirety of their RMD for living expenses, as it allows them to contribute to charitable organizations while minimizing their tax liability.
The QCD strategy aligns financial goals with philanthropic intentions, creating a win-win scenario for retirees and charitable causes.
If this approach to strategic philanthropy interests you, but you’re not sure which charity(ies) to donate to, feel free to consult with our philanthropic advisory team, as we are happy to research and identify charities that align with your values and passions.