Retirement accounts can be used for charitable giving. Find out how!
A qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the Custodian of your IRA to an organization eligible to receive tax deductible contributions. In order to do this, you must be at least 70 ½ when the distribution is made. Being 70 ½ will ensure that the QCD will count towards your required minimum distribution (RMD). If you are a retiree over the age 70 ½ who does not need the funds from an RMD this option may be something to consider to reduce your overall tax on your annual income.
The rules related to RMDs from an IRA were established with the enactment of the Employee Retirement Income Security Act (ERISA) of 1974. ERISA defined penalty-free distributions as going into effect the year a taxpayer turns age 70 ½. The specific rules as it relates to penalty-free distributions and RMDs has been changed several times since 1974 however the QCD became a permanent part of the tax code in 2015. Individuals who reach the age of 70 ½ can take the mandatory distributions and give the money to a charity thus making them excluded from the taxpayer’s adjusted gross income. The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 limit is included in your income as any other distribution.
The RMD must go to a qualified 501 (c)3 organization. Funds cannot be transferred to a Donor Advised Fund or a broker-sponsored charitable gift fund. The RMD must go directly from the IRA Custodian to the charity for it to qualify. You cannot take the distribution personally and then write a check to the charity. If you do – then you will be taxed on the distribution.
You must also have the same type of acknowledgement of your contribution that you would need to claim a deduction for charitable contribution. You want to have enough time to allow your Custodian to make the transfer and to confirm its receipt before December 31st.
Your spouse can also have a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions the distribution is first considered to be paid out of otherwise taxable income.
Only distributions from an individual IRA are eligible for QCDs – not from a SEP or SIMPLE IRA if they are still active and receiving ongoing employer contributions nor from any type of employer retirement plan. A QCD is permitted from a Roth IRA as well, though distributions over 59 ½ from a Roth IRA are already tax-free and therefore QCD rules wouldn’t be relevant. One important stipulation of using a QCD to satisfy an RMD obligation is that an RMD is presumed to be satisfied by the first distribution that comes out of the IRA for the year. And because IRS code does not permit an RMD from being rolled back over into an IRA, once an RMD occurs, it is irrevocably distributed and taxable.
While there are clear tax benefits to doing a QCD from an IRA, in some situations it can be even more advantageous to take an RMD and offset the income by donating appreciated securities instead. In this scenario there is a charitable tax deduction and permanently avoids the capital gains taxes.
Now is a good time to start thinking about using your RMD as a QCD to lower your AGI in 2017! Be sure to reach out to your CPA or a tax specialist to discuss your options!