Qualified Charitable Distributions (QCDs) are not only a way to help great causes and those in need, but they are also a way to manage your tax exposure and avoid unpleasant surprises.
For people who are at least 70 ½, and who don’t need income (or who simply want to avoid the income tax) from their Required Minimum Distributions (RMDs), QCDs are a nice tool to have in your retirement toolbox.
A Qualified Charitable Distribution (QCD) is a distribution from your IRA, that goes directly from your plan’s custodian to a qualified charity.
Qualified charitable distributions can be paid to satisfy the Required Minimum Distribution (RMD) rule which until recently started at age 72 for traditional IRAs. (RMD ages have increased to 73 in 2023 and will jump again to 75 in 2033.) And, the money distributed does not count to your Adjusted Gross Income (AGI) as it does for a regular distribution.
Qualified Charitable Distributions from your traditional IRA are a way to take your RMD without having to report it as income — and paying the requisite taxes.
So, QCDs reduce your Adjusted Gross Income (AGI), which generally provides a greater tax benefit than claiming the charitable contribution as a tax deduction (and you don’t need to itemize).
QCDs are a way to reduce the tax burden of an RMD for seniors who don’t need the money as income and want to avoid being pushed into paying more taxes or a higher tax bracket.
You make a QCD by instructing your IRA custodian to pay part or all of your RMD to a qualified 501(c)(3) charity.
The rules for QCDs aren’t very complicated, but there are some:
- To make a qualified charitable distribution you have to be 70½ or older.
- For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline. For most folks that’s December 31.
- The maximum annual amount that can qualify for a QCD is $100,000. That goes for one big contribution or many smaller contributions — the total yearly max is $100K.
- Your QCD can’t exceed the amount of your money that would otherwise be taxed as ordinary income. That means you can’t donate more than what you owe in taxes and qualify for a tax refund.
- If you are also thinking of contributing to an IRA, that contribution may reduce the amount of the QCD you can deduct.
Anyone with a traditional IRA who is 70½ or older than can make a QCD. However, QCD rules only apply to IRAs — they do not apply to 401(k)s, 403(b)s, SIMPLE, or SEP IRAs.
For tax purposes, qualified charities are defined by the IRS. This is their list of the types of organizations that qualify as qualified charities:
- A community chest, corporation, trust, fund, or foundation
- A church, synagogue, or other religious organization
- War veterans’ organizations
- Nonprofit volunteer fire companies
- A civil defense organization created under federal, state, or local law
- A domestic fraternal society that operates as a lodge (but only if the contribution is to be used exclusively for charitable purposes)
- A nonprofit cemetery (but only if the funds go to take care of the cemetery as a whole and not a particular grave)
Donations to states or the federal government are also considered charitable contributions if the donation is made strictly for public purposes.
The IRS has a handy tool that lets you look up a charitable organization to see if it is registered and can accept donations.
QCDs are capped at $100,000 per person, per year. For a married couple where each spouse has their own IRA, each spouse can contribute up to $100,000 from their own account so long as they are both older than 70½.
So, if you are married, each spouse can contribute up to $100,000 from their own IRAs for a big donation of $200,000.
Unlike the distributions from your traditional IRA, there is no federal or state withholding tax on distributions made to qualified charities.
You report your charitable gift as a normal distribution on your taxes using IRS Form 1099-R. (This only works for IRAs you did not inherit. If you are making a distribution from an inherited IRA or an inherited Roth IRA, your charitable distribution is reported as a death distribution.)
Another great thing about QCDs is you don’t have to itemize your tax return to benefit from one. That means you can take advantage of the higher standard tax deduction passed in the 2017 Tax Cuts and Jobs Act (TCJA) and still use your QCD for charitable giving.
Of course, the IRS won’t let you double dip. Though your QCD amount is not taxed, you can’t also claim the distribution as a charitable tax deduction.
One final word of advice: when you make a QCD, be sure to get the same type of acknowledgment of the donation (a letter or receipt) that you would normally get to claim a charitable contribution deduction on your taxes.
How to Model QCDs in the NewRetirement Retirement Planner
Does a QCD sound interesting to you? Why not model the distribution in the NewRetirement Planner to see the tax and income impacts and assess the short and long term implications on your wealth.
Should You Do a QCD?
Before you model a QCD, you will first want to assess whether or not you want to or would financially benefit from doing a QCD and when.
It is easy to assess for three of the most common scenarios:
1. You Want to Give: This consideration is easy. What do you want to give and when?
2. Should you use a QCD to reduce your taxable income and put yourself in a lower tax bracket? To make this assessment, go to the Insights > Tax page and scroll down to the chart showing “Net Taxable Income by Federal Tax Bracket.” During years when you are pushing into a higher tax bracket, you may want to use a QCD to reduce your income.
3. Do you want to give away your RMD because you don’t actually need that income to cover projected expenses? To see if your RMDs are being used to cover projected expenses, go to the NewRetirement Planner Dashboard and examine the “Lifetime Retirement Projection” chart. Look for when your RMDs are appearing above your expenses line. When that happens, it means that your RMDs are excess income — not needed to cover your planned spending.
How to Model a QCD…
So, once you have identified opportunities, you will want to run scenarios in the Planner so that you can actually see your tax savings!
- Navigate to My Plan > Withdrawals
- Scroll to “Do you have any planned one-time withdrawals or distributions?
- Click on “Add another one-time withdrawal or disbursement”
- Select your tax-deferred IRA account for making the withdrawal
- For a QCD, you’ll want to select “Deductible Disbursement”
- Enter the amount to donate with a QCD
- Enter the age for the QCD disbursement
- Repeat for every year you wish to make this type of withdrawal
- Everytime you model a QCD, see how your lifetime taxes change. You can also assess the changes on the tax charts in Insights!