Qualified Charitable Distributions – A Powerful Way to Give

Close up Coins in glass jar for giving and donation concept

Each year, many of our Clients share their charitable intentions with us and we work to ensure they’re able to express those intentions in such a way that they and the charity receive the maximum benefit. Examples of strategies we regularly employ include using Donor Advised Funds, donating appreciated shares of stock, and listing charities as beneficiaries in a Client’s estate plan. We’ll explore yet another strategy in this piece: Qualified Charitable Distributions (QCD) from a Traditional IRA.

First, it is important to note that there are several requirements that need to be met before one can take advantage of this strategy:

• The account holder must be over age 70 ½
• In virtually all cases, the distribution must come from a tax-deferred IRA – for simplicity, we’ll focus on Traditional IRAs
• QCDs are limited to $100,000/year per person and must be transferred directly from the IRA to a qualifying charity

Once it has been determined that a Client meets these requirements, the next step is to determine the amount of the charitable distribution. Although each Client’s situation is unique, there are a few items we review in every case:

1. Will the QCD be used to satisfy some or all of the Client’s Required Minimum Distribution (RMD)? As noted above, the account holder must be over age 70 ½ to qualify for this strategy, which is the age at which RMDs begin. Using a QCD to satisfy one’s annual RMD can have significant tax benefits (see below). Furthermore, it means that the charity is receiving “super-charged” dollars – the money in the IRA was deposited before being taxed, grew tax-deferred for the time it was in the account, and is received by the charity as a tax-free gift.
2. How will the QCD affect the Client’s tax situation? When an account holder makes a QCD, the amount of the distribution is excluded from their Adjusted Gross Income (AGI). This can be a powerful strategy to employ for Clients with large IRA balances, as their RMDs will be commensurately large; excluding this income from their tax calculation can lead to significant tax savings. Furthermore, reducing a Client’s AGI could mean that they’re able to take larger deductions against their income for medical and miscellaneous expenses on Schedule A of their tax return.
3. What other parts of the Client’s financial plan will be affected? The following is just one example of the “fringe benefits” of a QCD: by definition, if an account holder qualifies for a QCD then they also qualify for Medicare (eligibility begins at age 65). Medicare premiums are based on AGI; the lower the figure, the lower the premium due. If a Client’s AGI just above a given threshold, reducing their AGI by that amount can lead to savings of $1,000/year.

As mentioned above, there are a number of ways to build charitable giving into one’s financial plan. If the information above has piqued your interest in taking advantage of QCDs, please don’t hesitate to reach out to us to continue the conversation!