Qualified Charitable Distributions

Qualified charitable distributions (QCDs) provide an opportunity to make a tax-free donation to charity using your traditional individual retirement account (IRA). If you’re 70½ or older, making QCDs lets you maximize your charitable impact while reducing your taxable income. If you do not need all the money from your IRA required minimum distribution (RMD), making a charitable gift may be a tax-efficient way to support causes and organizations that are near and dear to your heart.

Why consider QCDs? If you own an IRA, you must take RMDs starting at age 73, whether or not you need the funds. When you take an RMD from an IRA, it creates taxable income. Increasing your income could push you into a higher tax bracket, and may impact your ability to take certain tax deductions and potentially, taxes on your Social Security and your Medicare premiums.

While QCDs aren’t eligible for charitable tax deductions, they are not included in your taxable income like other IRA withdrawals are. They do count toward your annual RMD from your IRA. When you use your RMD to make a QCD, your taxable income is reduced dollar for dollar. This approach to charitable giving helps you save on taxes while supporting your philanthropic goals.

Tax Benefits of QCDs

Failing to take RMDs could result in hefty penalties. Qualified charitable distributions (QCDs) are a tax-smart way to use your RMDs to support your favorite charities. The assets from your IRA go directly to the charity, which means QCDs aren’t reported as taxable income and you won’t owe taxes on them. You don’t have to itemize deductions to realize the tax benefit either. For a QCD to count toward your current year’s RMD, the funds must come out of your IRA by the RMD deadline (usually December 31).

To avoid potential tax complications, your contribution should go directly to the charity of your choice from your IRA. If you receive the funds first, then donate, your contribution will not qualify as a QCD for tax purposes.

Who Can Make QCDs?

You can make a QCD as long as you are 70 ½ or older. When you make a QCD, you can instruct your IRA custodian to transfer all or part of your RMD up to $100,000 a year to one or more qualified 501(c)(3) charities. If you’re married and you and your spouse file taxes jointly, you can each make an annual QCD of $100,000 if you each have IRA accounts with a balance of $100,000 or more, for a potential total of $200,0000.

It bears repeating: The funds must go directly from your IRA to the charity. Your IRA custodian can send it for you by electronic transfer or check, or if you have check-writing capacity on the account, you can send the check as long as it is made out to the charity. Make sure the charity is a 501(c)(3) organization qualified to accept QCDs.

QCDs may result in greater tax savings than claiming a tax deduction for a cash donation. This is because QCDs reduce your adjusted gross income (AGI). AGI is used to determine your Medicare premiums and the taxable portion of your Social Security benefits, among other key financial calculations that could impact your retirement income and tax obligations.

Making a QCD reduces your taxable income, lowering your AGI, which could potentially be more beneficial than taking a charitable deduction. See the following example.