Navigating Qualified Charitable
Distributions in 5 Easy Steps
Provided by American Financial Advisors, LLC1
What is a qualified charitable distribution (QCD)?
A qualified charitable distribution, or a QCD, is a distribution from an IRA that goes directly to a qualifying charity and is not included in your reported taxable income for the year as the IRA owner. With a higher standard deduction, fewer taxpayers are itemizing their return, but with a QCD, you can reduce your taxable income and, ultimately, increase your tax savings.
Properly timing a QCD to offset an RMD is imperative.
It is recommended that QCDs be done early in the year. The first dollars withdrawn from an IRA in any year count toward the RMD. These first dollars out cannot be retroactively offset with a QCD. If an account owner takes all or a portion of her RMD, she can certainly do a QCD later in the year. However, these later QCDs will be over and above the amounts already withdrawn.
1. Either an IRA owner or a beneficiary can do a QCD. The individual must be at least age 70 ½ at the time of the transaction. Reaching age 70 ½ later in the year is not enough. Both spouses can do a QCD when each spouse does the QCD from their own IRA.
2. A QCD can be made from an IRA, an inactive SEP or SIMPLE IRA, or a Roth IRA. Only pre-tax amounts can be used for a QCD, which makes the use of Roth funds very unlikely. The QCD must be a direct transfer to a qualifying charity. A check payable to the charity but sent to the IRA owner will qualify as a QCD, as will a check written from a “checkbook IRA” to a qualifying charity. If an IRA owner receives a check payable to them from their IRA and then later gives those funds to charity, that is not considered a QCD.
3. A charity must be a qualifying charity. It cannot be a donor-advised fund or a private foundation. A gift to a charitable gift annuity will also not qualify. A QCD to a charity where the IRA owner has an outstanding pledge will qualify and will not create a prohibited transaction. The QCD must satisfy all charitable deduction rules. If a distribution to a charity is more than $100,000, the amount over $100,000 is taxable to the IRA owner and is deductible on the owner’s income tax return. The excess amount cannot be carried over to a future tax year.
4. A QCD can satisfy a required minimum distribution (RMD). QCD’s are not limited to the amount of the RMD, but are capped at $100,000 a year. If an RMD is more than $100,000, any amounts in excess of the QCD are taxable to the IRA owner.
5. The IRA custodian has no special tax reporting for a QCD. The QCD will be reported on Form 1099-R as a regular distribution. The IRA owner will need to report the QCD on their tax return. The amount of the QCD is excluded from the owner’s taxable income. The IRA owner also cannot take a charitable deduction for the QCD amount.
For more information on QCDs and other key areas of retirement planning, please contact us with any questions or schedule a time for a visit. Please call us at (770) 977-2434, send an email to This email address is being protected from spambots. You need JavaScript enabled to view it.
Citations:
1 - © 2019 Ed Slott and Company, LLC
