Required minimum distributions (RMDs) from individual retirement accounts (IRAs) can be a blessing. After all, you worked hard during your life to earn a regular form of income during your retirement. You can begin taking RMDs from your traditional IRA when you turn 72 years old. This is nonnegotiable and is a requirement of the account. Show
The distributions
taken are then taxed at ordinary income tax rates. As such, they can also be a burden because they can boost your annual income—sometimes into a higher
tax bracket. But there’s a way that you can put these distributions to good use, which can ultimately reduce your bottom line. Given the impact that RMDs can have on your tax bill, it’s worth creating long-term planning strategies around this rule. Key Takeaways
Who Can Use the Qualified Charitable Distribution (QCD) Rule?Congress made the qualified charitable distribution (QCD) a permanent rule in 2015. It allows owners of a traditional IRA to exclude RMDs from their adjusted gross income (AGI) if they give the money to approved charities, also known as qualified charitable organizations. The QCD rule allows you to deduct the amount you donate from your IRA. The QCD counts as part of your annual RMD amount, and you must pay the distribution directly from your IRA to the qualified charity. Thus, if you are at least age 72, you can use the QCD rule to exempt your RMDs from taxation. You can choose to make full or partial RMD distributions to charities. For example, if your RMD amount is $5,000 a year, you can make a $3,000 charitable distribution and take the remaining $2,000 yourself. You can also give the full $5,000 to charity if you choose to do so. Here’s
how it works. Once you decide to make a QCD, choose a charity and make sure it qualifies as a charitable organization under Internal Revenue Service (IRS) rules. You must let your IRA custodian know of your intentions and the amount, as they
are the ones who will cut the check to the charity on your behalf. The investment firm then sends the check to the organization or to you, which you then send to the charity. QCDs must be made directly from your IRA. A distribution that is paid to you and then passed on to a charitable organization does not count. Eligible DistributionsAll contributions and earnings that accumulate inside a traditional IRA are eligible for QCDs. The IRS caps the amount that you can donate each year as a QCD directly from your IRA to $100,000. Anything in excess of this amount must be taken as an itemized deduction. Although it reduces your AGI, you cannot claim your charitable donation as a tax deduction on your annual tax return. The exception is nondeductible contributions, as they are considered a tax-free return of basis. Joint gifting strategies are also not available for the purpose of QCDs, which means that a couple cannot take both of their aggregate RMD amounts from a single account and exclude the entire amount from their AGI. Each of them must take their RMD from their own account for both to qualify. The QCD strategy can also benefit traditional IRA owners who want to convert their balances to Roth accounts, as the QCD will reduce the amount of taxable money in the account. The IRS offers a searchable database of approved charities on its website. The AGI AdvantageYou can generally take an itemized tax deduction when you donate money to a 501(c)(3) charitable organization, which reduces your AGI. Keep in mind, though, that you must have enough deductions to make itemizing worthwhile. But you need to have at least $13,000 for single filers (or $26,000 for married couples filing jointly) in deductions to benefit from itemizing since the standard deduction in 2022 for a single filer is $12,950 for singles and $25,900 for married couples filing jointly. In 2023, the standard deduction increased to $13,850 for single filers and $27,700 for married couples filing jointly. The QCD rule offers you a way to reduce your AGI through a charitable donation without having to itemize your deductions. Because AGI is used for many tax calculations, having a lower number allows you to stay in a lower tax bracket, reduce or eliminate the taxation of Social Security or other income, and remain eligible for deductions and credits that might be lost if you had to declare the RMD amount as income. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 increased the age at which IRA owners must begin RMDs to 72. But the age at which you can start taking QCDs remains 70½, creating an 18-month window in which IRA distributions qualify as charitable contributions that lower AGI even though they are not RMDs. Should I Use the QCD Rule?The main rule about QCDs is that the distributions must be made directly to the charity, not to you. This means that the check must be made out to the charity. If it isn’t, it is counted as a taxable distribution. You can receive the check and deliver it to the organization, but you can’t deposit the check and make out another one to the charity. The donation amount must be substantiated by the charity with a written receipt. But the question remains: Should you use the rule? It depends on your situation. It also makes sense if other things make sense in your situation. Using the rule makes sense if you:
There are cases in which an IRA RMD doesn’t provide the best benefit as a charitable donation. Securities like stocks provide a greater tax benefit to you if they appreciate in
value since the time of purchase, as you won’t have to pay capital gains. This also helps reduce any capital gains that you may have to pay if you decide to liquidate these assets later in the future. Keep in mind that you may use the QCD rule for distributions from a
Roth IRA. But doing so doesn’t provide you with any tax benefit, as your distributions are already tax free. What is the benefit of a qualified charitable distribution (QCD)?A qualified charitable distribution (QCD) allows you to lower your adjusted gross income (AGI) while also satisfying the required minimum distribution (RMD) amounts set by the Internal Revenue Service (IRS). This can help offset other taxes, such as Social Security. When can I make a QCD from my individual retirement account (IRA)?You can make a QCD from your individual retirement account (IRA) whenever you would make any other withdrawals, which is to say that you can make a QCD anytime once you reach the age of 70½. How do I report a QCD on my tax return?You report the full amount of the QCD on the line for IRA distributions. On the line for the taxable amount, enter zero, then write “QCD” next to it. IRS Form 1040 has additional information. The Bottom LineIf you own an IRA and wish to lower your AGI, you can use the QCD rule to efficiently disperse money to a charity of your choice. This strategy is superior to taking receipt of the distribution yourself and then donating to charity, because that may not reduce your AGI. If you use it properly, the QCD rule will provide you with a convenient tax deduction for years to come while fulfilling your philanthropic needs. What is the benefit of a qualified charitable distribution?A qualified charitable distribution (QCD) allows individuals who are 70½ years old or older to donate up to $100,000 total to one or more charities directly from a taxable IRA instead of taking their required minimum distributions.
How do I get a qualified charitable distribution from an IRA?Communicate with your IRA's custodian (where your IRA is held) that you are interested in making a QCD(s). Make the request for a QCD(s) in writing. Specify the dollar amount that you wish to contribute to each individual charity. Request the check be made payable to the charity(ies) but be mailed to you.
Is a QCD taxable income?A QCD is a direct transfer of funds from your IRA, payable directly to a qualified charity, as described in the QCD provision in the Internal Revenue Code. Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to $100,000. The QCD is excluded from your taxable income.
Do you get a deduction for QCD?QCD FAQs. Can a donor claim a charitable income tax deduction for a QCD gift? No. A donor cannot claim an income tax deduction, but by utilizing the QCD the donor can lower taxable income, which may provide greater income tax savings in comparison to making a cash gift and claiming an income tax deduction.
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What is a qualified charitable distribution from an ira
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