Don’t miss these 7 rules to a qualified charitable distribution (QCD)
If you are looking for ways to lower your taxable income you may want to consider a qualified charitable distribution.
Even though congress has waived the required minimum distribution (RMD) from retirement accounts this year, charitably inclined investors that are 70 1/2 or older are still eligible to donate to charities using a qualified charitable distribution (QCD). A QCD is a direct transfer of funds from an IRA custodian, payable 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 amount for the year, up to $100,000, and can also be excluded from your taxable income. This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution later on. In this scenario, the funds would be counted as taxable income even if you later offset that income with the charitable contribution deduction.
The 7 rules of QCDs
A QCD must adhere to the following requirements:
- You must be at least 70½ years old at the time you request a QCD. If you process a distribution prior to reaching age 70½, the distribution will be treated as taxable income.
- For a QCD to count toward your current year's RMD, the funds must come out of your IRA by your RMD deadline, which is generally December 31 each year.
- Funds must be transferred directly from your IRA custodian to the qualified charity. This is accomplished by requesting your IRA custodian issue a check from your IRA payable to the charity. You can then request that the check be mailed to the charity, or forward the check to the charity yourself.
Note: If a distribution check is made payable to you, the distribution would NOT qualify as a QCD and would be treated as taxable income.
- The maximum annual distribution amount that can qualify for a QCD is $100,000. This limit would apply to the sum of QCDs made to one or more charities in a calendar year. If you’re a joint tax filer, both you and your spouse can make a $100,000 QCD from your own IRAs.
- The account types that are eligible for QCDs include:
- Traditional IRAs
- Inherited IRAs
- SEP IRA (inactive plans only*)
- SIMPLE IRA (inactive plans only*)
- Under certain circumstances, QCDs may be made from a Roth IRA. Roth IRAs are not subject to RMDs during your lifetime, and distributions are generally tax-free. Consult a tax advisor to determine if making a QCD from a Roth is appropriate for your situation.
- Certain charities are not eligible to receive QCDs, including donor-advised funds, private foundations, and supporting organizations. You are not allowed to receive any benefit in return for your charitable donation. For example, if your donation covers your cost of playing in a charitable golf tournament, your gift would not qualify as a QCD.
Tax filing for QCDs
A QCD is reported by your IRA custodian as a normal distribution on IRS Form 1099-R for any non-Inherited IRAs. For Inherited IRAs or Inherited Roth IRAs, the QCD will be reported as a death distribution. You should keep an acknowledgement of the donation from the charity for your tax records. Please consult a tax advisor to learn more.