A Qualified Charitable Distribution (QCD) is a donation to a charity made directly out of an Individual Retirement Account (IRA) that is excluded from your taxable income IF you meet all the requirements.
- You must be 70 ½ or older. You must be exactly age 70 ½ to make a QCD.
- A QCD must be DIRECTLY distributed from an IRA. A QCD must be distributed directly to the charity by a check linked to your IRA or by direct fund transfer. If funds are distributed to your bank account first and then given to the charity, the funds will be taxable and will not qualify for a QCD. Your qualified retirement accounts, such as a 401(k), 403(b), or 457, do not qualify for QCDs. A Traditional IRA, Rollover IRA, Inherited IRA, inactive SEP IRA, or inactive SIMPLE IRA are eligible for QCDs. A Roth IRA is already tax-free, so there are few to no tax advantages for making a QCD from a Roth IRA.
- Maximum annual QCD is $100,000. Each individual is eligible to make a QCD summing $100,000 annually to one or more charities. If you file taxes jointly with your spouse, your spouse can also make another $100,000 contribution from his or her own IRA in the same tax year. QCDs are also limited to the amount that would other be taxed an ordinary income not exceeding $100,000.
- Must be a qualified charity. The charity must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. Examples of charities that do not qualify for QCDs are Donor-advised funds, Private foundations, and Supporting organizations. It is important to receive a receipt from the charity to provide to the IRS when filing your tax return. https://www.irs.gov/charities-non-profits/tax-exempt-organization-search
- A QCD can satisfy your RMD. If you are at the age of Required Minimum Distributions (RMD) a QCD from your IRA can satisfy an IRA’s RMD, making your RMD tax-free. The QCD must be the firstdistribution that comes out of the IRA for the year. Once an IRA distribution is taken to satisfy the RMD requirement, you cannot take a QCD and have it retroactively applied to your RMD amount for that same year. You also cannot satisfy the RMD from a qualified employer account (i.e. 401(k)) with a QCD from you IRA. But remember that you can roll a qualified employer account to an IRA, which would resolve the inability to take a QCD from a qualified account. The recent passage of the SECURE Act raised the RMD age from 70 ½ to 72 but did not change the QCD age of 70 ½. The SECURE Act did create an “anti-abuse rule” restricting the ability to make a deductible contribution to an IRA and a QCD to a charity in the same year.
- December 31st deadline. The IRS is very strict regarding deadlines and age requirements. If you have an RMD you are required to distribute it from your account by December 31st to avoid penalty. So, if you are using a QCD to satisfy your RMD the charity must receive distribution from the IRA by December 31st of that tax year. If you give the charity a check from your IRA and they do not cash it until after the December 31st deadline it will not count to that prior years RMD and will count towards the year in which it is cashed.
It is always best practice to consult us (your financial advisor) and your CPA to determine if the QCD option meets your charitable and financial goals, and to ensure the distribution is done correctly to satisfy the federal requirements as outlined by the IRS.
Associate Financial Advisor
January 21, 2020