WHAT IS A QUALIFIED CHARITABLE DISTRIBUTION (QCD)?

Typically, distributions from traditional IRAs are taxed as ordinary income, but what if you could avoid those taxes?

That is where Qualified Charitable Distributions (QCD) comes in. A QCD allows you to take a distribution from your traditional IRA and exclude it from your taxable income, meaning you owe no tax on the distribution.

A QCD can also be used to satisfy all or a portion of your Required Minimum Distribution (RMD), which would allow you to avoid tax on the RMD. Sound great! Right? But, there are some rules that need to be followed . . .

Please note: a QCD can only be made from a Traditional or Rollover IRA. You cannot do a QCD from a 401(k), 403(b), 457 etc.

THE RULES: HOW TO COMPLETE A QCD

1. You must be at least 70 ½ or older to take advantage of doing a QCD.

2. The money must go directly from the IRA to the charitable organization.
The money cannot pass through the IRA holder, otherwise, the distribution becomes a taxable event. Most financial institutions (i.e. Fidelity, TD Ameritrade, Charles Schwab, Vanguard, etc.) have forms specifically created for facilitating the completion of a QCD.

3. The maximum QCD allowable on an annual basis is $100,000.

4. Donations cannot be directed toward Donor Advised Funds, Supporting Organizations, or Private Foundations.

5. At the end of the year, you’ll receive a 1099 tax notice for your IRA. The QCD will automatically be included with all other taxable distributions as code 7 in box 7 on the form. You will need to inform your tax preparer what portion of your IRA distributions were done as a QCD.

WHY SHOULD I CONSIDER A QCD?

A QCD is most appropriate if you make charitable donations and only take the standard deduction on your tax return as it restores your ability to take advantage of the tax savings charitable diving provides. Even if you itemize, a QCD may still make sense. For example, if your RMD bumps you into a higher tax bracket, which may also make more of your Social Security taxable, a QCD can help mitigate that. As always, before deciding whether a QCD is right for you, please talk with your qualified tax advisor or financial advisor.

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