You’re probably familiar with the Qualified Charitable Distribution (QCD) rules by now: where you can transfer funds out of an IRA to a charity, income tax free, and use the QCD to reduce the amount of your taxable IRA Required Minimum Distribution. It’s one of my favorite tax strategies, especially if you no longer itemize and can’t otherwise take a deduction for your charitable gifts. Here are a few nuances to the QCD rules to be aware of and use to your benefit:
You can start QCD’s as soon as you turn age 70 ½. When the RMD ages were raised in the last few years, the QCD age wasn’t. You literally have to be 6 months past your 70th birthday before your first withdrawal, but then you can get a jump on giving away some of your tax-infested IRA money before RMD’s even start. If you’re charitably minded and are expecting higher than desired RMD income, this is a way to proactively reduce your IRA balance before RMD age.
QCD’s are not only for IRA’s. You can also do QCD’s from Beneficiary IRA’s as long as you are over age 70 ½ at the time of the QCD. Interestingly, QCD’s out of 401k’s and active SEP and SIMPLE IRA’s are not allowed.
QCD’s are limited to $100,000 per year, per spouse. Feeling particularly generous and want to give away more than $100,000? You can - the excess amount would show up on your tax return as taxable income, but then you could potentially itemize that charitable gift to offset the income. (Talk to your tax preparer.)
Give to multiple entities. Choose your favorite church, charity or any 501(c)(3) tax-exempt organization with your gifting. Be aware that donor advised funds and private foundations do not qualify.
Two other points to remember: you cannot take possession of the QCD funds – they have to be directly transferred from your IRA account to your charity to qualify. Secondly, QCD activity is NOT reflected on your annual 1099 tax form from your IRA custodian, so it is your responsibility to let your tax preparer know. Otherwise, they’ll be unaware of the need to reduce your taxable income by the QCD amount, and all of your hard work would be undone.
There you have it – help the world while helping yourself save some taxes! Reach out if you have questions. I’m here to help.