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How You Give Matters: Qualified Charitable Distributions from IRAs
If philanthropy is one of your financial goals, it’s just as important to consider how,
when and what to give.
At the end of 2015, Congress restored an important option for charitable giving that
had expired the previous year. The Protecting Americans from Tax Hikes Act made
permanent the chance to make a qualified charitable distribution (QCD) from an
individual retirement account (IRA.) What this means is that certain IRA owners can
make contributions to their favorite charities directly from their IRAs, and the
distribution from the IRA to the charity counts towards the owner’s required minimum
distribution (RMDs) for the year.
QCDs: A strategy for tax-efficient giving
During our working years, we generally do most of our savings in qualified plans, such
as 401(k) and 403(b) accounts, and in IRAs. The benefit in saving this way is that we
don’t pay income tax on the money before it goes in, and the funds grow tax-
deferred until they’re withdrawn. However, eventually, the IRS requires the account
owner to start taking withdrawals. The SECURE Act, which went into effect on January
1, 2020, delayed the age at which an account owner must start taking their required
minimum Distributions from 70 ½ years old to 72 years old. That means taxpayers
who turn 70 ½ in 2020 or after have until April 1 of the year following their 72nd
birthday to begin taking their RMDs.
Plenty of people rely on withdrawals from IRAs and qualified accounts for their
income in retirement. But others cover their income needs with their social security
benefits, pensions, or other investments. This second group often has no need for
their RMDs and would prefer to avoid the additional income tax burden they incur. If
their financial goals include benefiting a charity, religious institution, or school, doing
it through a QCD may be a good strategy to consider.
Anyone over age 70 ½ can make a QCD of up to $100,000 per year. That age didn’t
change with the SECURE Act. The distribution can be used to satisfy an individual’s
RMD. The taxpayer doesn’t receive a charitable income tax deduction, but there is no
need for him or her to report the distribution on their income tax return. The
transaction is entirely tax neutral.
Other ways to make charitable donations using money from your IRA
One alternative to the QCD is simply to withdraw funds from an IRA, report that
withdrawal as taxable income, and then make a tax deductible donation. In some
cases, that may have a very similar result to the QCD, but there are a few reasons
why the QCD may be a better option. First of all, if the taxpayer makes a charitable
donation without using a QCD, he or she will need to itemize income tax deductions,
when taking the standard deduction might otherwise be simpler. Also, the charitable
deduction is capped ata percentage of the taxpayer’s adjusted gross income (AGI).
The QCD avoids the chance of running up against that cap. Some income tax
deductions, such as the deduction for unreimbursed medical expenses, are only
available if they exceed a certain percentage of the taxpayer’s AGI. When RMDs drive
up the taxpayer’s income, even if those funds ultimately go to charity, it can be
harder to meet those minimums.
There are many different ways to provide financial support to a charity, some with
significant tax advantages to the donor. They range from sophisticated strategies
like charitable trusts to using your credit card or writing a check. You can consider
donating appreciated stock. You can also name a charity as a beneficiary under
your will or as beneficiary of an insurance policy, IRA, or annuity.
It’s a good idea to explore the possibilities before deciding that any one strategy is
right for you.
If you opt to use a QCD to make a charitable contribution, make sure you follow the
There are a couple of important things to remember about QCDs. The contribution
must go directly from the IRA to the charity. You cannot receive the funds directly
and then pass them on to the organization. Also, the QCD is only available for gifts to
public charities, not private family foundations, charitable trusts, or donor advised
funds. Finally, the SECURE Act removed the prohibition on making IRA contributions
after age 70 ½, so it’s now possible to contribute to an IRA and do a QCD in the same
year; however, it’s important to note that the IRA contribution will reduce the amount
that can be transferred via QCD.
As with all big financial decisions, how and when to contribute to charity is something
you should think through carefully. The QCD has unique advantages, and your tax
and financial advisors can help you decide if it’s the right strategy for you.