Charitable giving is a huge component of many financial plans—and for good reason. Donating to a cause you’re passionate about allows you to give back to your community in a meaningful way.
From a financial standpoint, there are many benefits to charitable giving as well. One way you can streamline your charitable giving is by using your required minimum distributions (RMDs). Instead of transferring the money into your bank account, consider sending your RMDs straight to a charity, which is called a qualified charitable distribution (QCD).
Let’s discuss the benefits of a QCD.
Benefits of Making a Qualified Charitable Distribution
While cutting out yourself as a middleman saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first.
When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.
Are You Eligible to Make a Qualified Charitable Distribution?
Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made.
In addition to having the right kind of account, these other requirements must be met: (1)
- You must be age 70½ or older.
- To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
- QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
- Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
- Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.
Is Your Charity Eligible to Receive a Qualified Charitable Distribution?
After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.
On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are: (2)
- Private foundations
- Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
- Donor-advised funds managed by public charities on behalf of individuals, families, or organizations
How Are Qualified Charitable Distributions Reported?
Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding.
Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified.
Work With a Professional
Since charitable giving is important to you, it makes sense to do so in the most tax-efficient manner possible. QCDs are a great opportunity for anyone looking to do some good with their RMDs.
There are quite a few rules involved in making a QCD, so if you’re interested in learning more about qualified charitable distributions, it might be prudent to work with a financial advisor. Our team at Fiduciary Wealth Management would be happy to review your charitable giving plan to see if using your RMDs to make a qualified charitable distribution is the right strategy for you. Schedule a phone call now!
About Rocklin Senavinin, CFP®
With over 20 years of experience in the financial planning industry, Roc has dedicated his career to helping individuals live comfortably in retirement and enjoy the assets they have spent their career building. He is co-founder of Fiduciary Wealth Management, a fee-only registered investment advisory firm in Little Rock, Arkansas. As a CERTIFIED FINANCIAL PLANNER™ professional, he has advanced training in the holistic process of creating a personal financial plan that addresses a person’s comprehensive needs for the short and long term. To learn more, connect with Roc on LinkedIn or visit www.fidwm.com. If you have questions, feel free to schedule a phone call using this link.
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