Author: Erin Castillo
Have you been asked about making qualified charitable distributions either from your CPA or from your retirement advisor? If you have and would like to know more about what this string of words means or deciphering advice from your CPA, this article may be helpful for you.
1) What is a Qualified Charitable Distribution?
A Qualified Charitable Distribution (QCD) or sometimes called an IRA charitable distribution is defined as a transfer of funds or distribution from an IRA directly made by the IRA trustee to a charitable organization. The charitable organization has to be defined as a 501(c)(3) organization and must be excluded from private foundation status and the donor must not receive any benefit for making a QCD to a charity. For example, a QCD will not be qualified if it was used to purchase auction tickets or to receive a t-shirt from a charity. The distributions that are transferred to the charitable organization from your IRA are excluded from your gross income – woohoo!
2) Am I eligible to make a QCD?
You may make a QCD if you are age 70 ½ years or older. An individual can contribute a maximum of $100,000 per year in QCD’s and married couples can make a total of $200,000 in QCD’s with a limit of $100,000 per spouse. The donor can make several small contributions throughout the year or one large contribution but they cannot exceed $100,000. QCD’s are also limited to the amount that would be normally taxed as ordinary income and excludes any non-deductible contributions.
Qualified individuals can make these distributions from any of the following IRA accounts:
- Traditional IRA
- Inherited IRA
- Inactive Simplified Employee Pension (SEP) plan
- Inactive Savings Incentive Match Plan for Employees (SIMPLE) IRAs
3) What does the process look like and why is it advantageous?
The process of making a qualified charitable distribution should go through your IRA custodian. The distribution is a direct transfer that should never pass through your hands as the IRA holder but instead, your custodian can send a direct check to the charitable organization or give you, the account owner a check payable to the organization for you to deliver yourself. , who will hand it. QCD’s are advantageous to those who are required to take required minimum distributions (RMD’s) each year – beginning at 72 years old. Since the RMD can sometimes move the taxpayer into a higher tax bracket, a QCD is a great way to lower gross income in a high-income tax year. These QCD’s can count towards your required minimum distribution for a given tax year and thus must be made by Dec. 31 of the tax year. By making your charitable contributions in this way, you also benefit by being able to make a larger donation than you might normally be able to. This is due to the limitation on charitable gifts that can be deducted by itemizing your deductions on your federal tax return as it usually ranges from 20-60% of the donor’s adjusted gross income (AGI). Some of our clients also see the value in making QCD’s because it takes a lot for them to itemize deductions and thus, they take the standard deduction. With QCD’s you can still benefit from making charitable contributions without having to itemize your deductions.
4) Commonly Asked Questions regarding QCD’s
Can I make a Qualified Charitable Distribution from my 401(k)?
No, your 401(k) is not eligible for making QCD’s. However, you can potentially roll over or transfer funds from your 401(k) to an IRA and from there make an eligible QCD.
How should I keep records of my QCD?
Once you make the qualifying contribution, you should expect to receive a statement from the organization acknowledging that no goods or services were received in exchange for your contribution from your IRA. You can also expect to receive a letter stating that the contribution is an IRA QCD and confirms that it is not just a regular cash donation but you may need to ask.
What happens if my QCD is over the $100,000 limit?
Any amount over the $100,000 maximum will be included in your income.
To learn more about this topic contact Origin CPA Group today.