Moyo Studio / Getty Images It might seem counterintuitive that anyone would want to give their savings away after making contributions for years in anticipation of the day when they would retire, but there can be tax advantages for doing so.
Required Minimum Distributions
You must begin taking required minimum distributions (RMD) from a traditional IRA when you reach age 72, or 70 1/2 if you reached 70 1/2 before Dec. 31, 2019, even if you don’t want or need the money at this time. These distributions are taxable at ordinary income rates. In most cases, you’ll have to pay a 50% excise tax on whatever distributions you were supposed to take but didn’t.
How a Qualified Charitable Distribution Can Help
QCDs count toward your required minimum distribution for the year. If you have to take RMDs but you don’t really want or need the money, QCDs can be a good way to distribute the minimum required amount out of the IRA and thereby avoid the 50% excise tax penalty. As an added benefit, you’ll avoid paying income tax on the distributions.
Qualifying Rules for QCDs
You must be at least 70 1/2 at the time you make a qualified charitable distribution, depending on when you reached age 70 1/2. You can make a QCD at that age even if you don’t have to begin taking RMDs until age 72. The funds must be transferred directly from the IRA custodian to the eligible charity—and “eligible” is an important word here. The charity must be one that is approved by the IRS. You can’t simply turn the money over to a friend or neighbor. Eligible charities include 501(c)(3) organizations and houses of worship. Donor-advised funds and so-called supporting organizations are not permitted to receive QCDs on a tax-advantaged basis. The maximum amount that can be donated through a qualified charitable distribution is $100,000 per IRA owner. This means that each spouse can donate $100,000 if you’re married, but you can’t “share” the limit. In other words, one spouse can’t give $125,000 and the other $75,000. You’re each separately subject to the $100,000 limit.
Effect on Your Adjusted Gross Income
QCDs can be used to help keep your adjusted gross income (AGI) and taxable income within a desired range, as income from a charitable distribution “bypasses” your Form 1040. That is, you’ll still report the full amount of the QCD on Form 1040 on the line for IRA distributions, but you’ll enter zero (and “QCD” next to it) as the taxable amount if the full amount was a QCD. This can help prevent your income from reaching the thresholds for the net investment income tax and from disqualifying you from claiming other tax breaks. These thresholds depend on your filing status, which is determined by factors such as whether you’re married, widowed, or support one or more child dependents:
Married filing jointly or qualifying widow(er): $250,000All other cases: $200,000Married filing separately: $125,000
The Rules Are Different for Roth IRAs
Roth IRAs have different QCD rules than traditional IRAs. It’s possible to take a QCD out of a Roth IRA, but there’s generally no advantage in doing so because Roth IRA distributions are already tax-free. You can’t deduct contributions made to Roth accounts, as you’ve already paid taxes on those dollars you contributed. Roth IRAs aren’t subject to RMDs, either (during the owner’s life), so the more tax-efficient move might be to use a traditional IRA (if you have one) to fund the QCD.
You Can’t Claim a Deduction, Too
The key benefit of a QCD is that the distribution amount is not included on your Form 1040 as income, but there’s a bit of a downside here, too. The QCD cannot also be used as a deductible charitable contribution if you itemize your deductions. That would be something of a double tax break for the same transaction. A QCD has no effect on your ability to claim the standard deduction, however. QCDs can benefit older taxpayers who take the standard deduction rather than itemize because there’s no tax benefit in making a donation to charity when you claim the standard deduction. In other words, you’re not losing anything by making the QCD. For non-itemizers, donating to charity via a direct transfer out of an IRA is the only way to get a tangible tax benefit from that donation.
