Lots of initials – IRA, RMD, and QCD. What all those letters might spell is big tax savings if you qualify.
A Qualified Charitable Distribution (QCD) is a withdrawal from your IRA (but not other retirement account) that is payed directly to an eligible charity (or charities) of your choice. Done correctly a QCD can provide outstanding tax benefits.
In order to take advantage of a QCD, a taxpayer must be age 70 ½ or older. For most taxpayers of that age they are also facing Required Minimum Distributions (RMD). RMDs are IRS mandated withdrawals that are intended to generate tax revenue for the federal government. RMDs and QCDs are loosely connected.
If you are facing an RMD from your IRA and have determined that you do not need the funds for personal use and you have identified a charity (or multiple charities) that you would like to support, you can direct your IRA custodian to send those funds (and perhaps more) to the non-profit of your choosing. Your taxable income will not rise. You do not need to itemize deductions on your tax return to receive this tax advantage. You will receive a 1099 from your custodian reporting the withdrawal and you (or your tax preparer) will indicate a QCD on your 1040 return. You will receive these tax benefits in addition to your standard deduction. Additionally, any other income based costs you might face (Medicare Part B premiums come to mind) will not be increased.
Note, the charities that you choose may be ones you are already supporting out of your pocket. You may be supporting your place of worship or pledging to important programs. You can use the QCD strategy to stretch those dollars even further. We recently counseled a client who has tithed to her church for her entire adult life. It has become a bit more difficult to do since she retired. By using the QCD strategy and benefiting from the resultant tax savings she can continue to support her church at a level that makes her very happy.
Independent of the actual RMD dollar amounts, the IRS code permits a taxpayer to direct up to $100,000 each year to charity through a QCD. Married couples can direct up to $200,000 annually. One of our More than Money clients used this technique to support a capital campaign at their church at a level they did not dream they could afford. With proper planning throughout their entire financial picture (and careful cash flow analyses) they were able to see their church benefit now instead of waiting for a bequest in their estate plans.
It is critical that you consult with your financial advisor and/or tax professional prior to exercising a QCD. There are nuances to the QCD process that must be identified and followed. Do not delay. With Dec. 31 literally around the corner, you must explore this opportunity to reduce your (already too high) income taxes. Call today!