IF YOU’RE IN YOUR 70s or older and you are charitably inclined, it’s time to get acquainted with one of your best financial friends: the qualified charitable distribution, or QCD.
A QCD is a distribution that’s made directly from your IRA to an organization eligible to receive tax-deductible contributions. A QCD counts toward your annual required minimum distribution, or RMD. But unlike a regular RMD, the QCD won’t add to your taxable income for the year—a potentially huge advantage. You must be at least age 70½ to make a qualified charitable distribution and the maximum amount in any given year is $100,000.
QCDs have recently become more valuable. Thanks to 2017’s tax law, the standard deduction has roughly doubled. That means fewer taxpayers are itemizing their deductions, so they aren’t getting any tax break for their charitable contributions. What to do? If you’re 70½ or older, you can take part of your regular RMD—which would be taxable—and replace it with a nontaxable QCD. In effect, you’re making a tax-deductible charitable contribution, even if you’re claiming the standard deduction.
Because your taxable income is lower, you could also enjoy a slew of other benefits. For instance, reducing your taxable RMD might keep your income below one of the thresholds for IRMAA, short for income-related monthly adjustment amount. It’s a topic I recently wrote about. Breaching one of the IRMAA thresholds by $1 can mean a substantial increase in your Medicare premiums.
To do a QCD correctly, keep a few key details in mind. The IRS does not allow distributions to donor-advised funds or private foundations. The distribution cannot come from a 401(k). The distribution can come from an inherited IRA, assuming the beneficiary is over age 70½. The recent SECURE Act, which raised the RMD age to 72, did not increase the QCD age. It remains age 70½.
The custodian or trustee for your IRA must handle your distribution to a qualified 501(c)(3) public charity. If you withdrew $1,000 from an IRA and then contributed the money to a charity, the $1,000 would count as taxable income and you’d have to pay taxes. But if the $1,000 is transferred directly to the charity, or if you receive a check made out to the charity and then donate the check, the $1,000 won’t be considered part of your taxable income.
The tax filing is easy enough. On your Form 1040 federal tax return, report the full amount of the charitable distribution on the line for IRA distributions, along with any regular taxable withdrawal. But on the line for the taxable amount, exclude the sum you donated with your QCD and enter “QCD” next to the line.
James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous articles include Danger: Cliff Ahead, Early and Often and Don’t Get an F.
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If you retire partway through the calendar year in which you reach age 70.5 and you contributed to a traditional IRA while working during that year, I’m told you may not make a QCD in that year. Wait until the following calendar year to begin making QCDs.
Also beware that while the Secure Act now allows deductible IRA contributions after age 70 these decrease the allowable QCD for that year.
If you are 72 or older and taking an RMD, the QCD withdrawal and donation must be processed *before* you take the RMD in order to be considered by the IRS to be included in the RMD amount. For example, don’t take your RMD in November (or monthly throughout the year) and then withdraw more funds as a QCD donation at year-end; your donation would be too late!