Reasons to Consider a QCD
If you’ve saved in a pre-tax retirement account, such as a traditional IRA or 401(k), you’ll need to begin taking required minimum distributions (RMDs) once you reach age 72, whether or not you need the funds to pay for your daily living expenses in retirement.
Investors who don’t need additional assets to fund their retirement expenses may be negatively impacted by RMDs, because these withdrawals are taxed at ordinary income rates. That additional income could put you in a higher tax bracket than anticipated in retirement. One solution to this challenge is to directly transfer your RMD to a charity. The IRS allows individuals over age 70 and a half to donate up to $100,000 per year from a retirement account directly to a charity, with no negative tax impact.
The benefits of making a QCD include the following.
- Maximize your charitable impact – As opposed to receiving your RMD, paying the required income taxes and donating the rest to charity, a QCD allows you to maximize your charitable impact by donating the full RMD amount directly to a charity of your choice. A QCD can be a win-win for both the charitable organization and your bottom line.
- Reduce your taxable income – QCDs have the potential to significantly reduce your income tax liability, as they’re not included in your taxable income for the year. This is especially beneficial for individuals who don’t rely on RMD income to fund their daily living expenses in retirement.
- No impact on your adjusted gross income – Many phaseouts are based on your adjusted gross income (AGI), including Medicare premiums, net investment income and certain tax credits. A benefit of making a QCD instead of taking an RMD is that your AGI remains unaffected, which may allow you to qualify for additional benefits.
- Up to $100,000 can be given per year, per taxpayer – Each individual taxpayer can contribute up to $100,000 per year as a QCD, which means if you’re married filing jointly, you can donate up to $200,000 per year.
- Timing and source flexibility – A taxpayer has flexibility to make one large QCD or several smaller contributions over the course of a year. In addition, QCDs can be made from more than one retirement account type, including traditional, inherited, SEP and SIMPLE IRAs.
- No itemization necessary – Because QCDs are excluded from your taxable income, you may be able realize the benefits of making charitable donations without needing to file itemized taxes.
- The ability to choose which charities you support – QCD donors are able to choose what charities they wish to support, including many hospitals, churches, research organizations and museums. However, it’s important to be aware that certain charities are not eligible to receive QCDs, such as donor-advised funds, private foundations and supporting organizations. Be sure to consult with your wealth manager prior to initiating a QCD to ensure your charity qualifies.
While a qualified charitable distribution can be a great way to minimize your taxes and maximize your charitable impact, it may not be the best strategy for everyone. If you’re considering a QCD, Creative Planning is here to help. Our advisors can help you determine whether a QCD is right for you and coordinate a direct transfer of assets to the charity of your choice.
For help with your chartable giving and tax planning strategies, schedule a call with a member of our team.