Qualified Charitable Distributions

Carolyn Frager, CFP®
Private Wealth Manager
cpi@creativeplanning.com

Required minimum distributions are a mandated withdrawal required by the IRS from your IRA, SEP IRA, SIMPLE IRA, or retirement plan when you reach age 70 ½. Roth IRAs are not included until after the death of the owner. At any time, you can withdraw more than the minimum requirement amount, but any portion of your required minimum distribution not withdrawn is subject to a 50% tax penalty. Yes, a 50% penalty! Certainly, an item on your to-do list that you do not want to overlook.

Your required minimum distribution is taxable to you at ordinary income rates, except any part that was taxed before (your basis). This increased income can cause a pivot into a higher tax bracket, increase Medicare premiums, or even increase the taxable amount of your social security income benefits. But since the distribution is mandated, is there an option to plan for this increased income? Yes. In December of 2015, Congress passed a law which allows individuals to give up to $100,000 to a charity directly from your retirement account when you are over 70 ½ years old without counting the distribution as taxable income. This type of distribution is called a Qualified Charitable Distribution or QCD.

Qualified Charitable Distributions are a great tool to utilize to meet philanthropic bequeaths during retirement as well as reducing your overall tax liability. Furthermore, QCDs don’t require you to itemize, which due to the 2017 tax reform and the adjustments it made to the list of itemized deductions as well as increase in the standard deduction, many taxpayers will take advantage of the higher standard deduction. Therefore, a QCD provides the benefit of gifting to charity but it also provides the reduction of taxable income, dollar-for-dollar up to $100,000.

Like many tax laws, there are imperative details and requirements you must follow to ensure the distribution qualifies as a QCD:

  • The distribution must be made once the participant as attained the age of 70 ½ or older.
  • The charity must be a 501(c )(3) organization and it must not be a private foundation, donor-advised fund, or supporting organization.
  •  For the QCD to be applied towards your current years required minimum distribution, the funds must come from your IRA before the deadline – generally December 31st.
  • The distribution must be made payable directly to the organization from the IRA trustee.

Upon completion of a QCD, we recommend obtaining the same confirmation or acknowledgment from the receiving institution of your donation. The documentation of your donation will be necessary upon tax filing to ensure your QCD is excluded from your taxable income on your Form 1040 tax return.

Qualified Charitable Distributions can be a good tool to utilize in the right situation, but it may not be the best strategy for everyone. If you are considering a charitable donation, please contact Creative Planning today to help us understand your personal situation and financial goals. This will result in customized financial portfolios and wealth management solutions tailored to your personal needs.

This commentary is provided for general information purposes only and should not be construed as investment,j tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.