After turning 70½, all individuals must make required minimum distributions (RMDs) from an individual retirement account (IRA), SIMPLE IRA, or SEP IRA. The money you're required to withdraw gets added to your taxable income. Failure to take your RMD by year-end could result in excise tax of 50% of the amount you should have withdrawn.
Did you know you could avoid some or all of the resulting income tax liability by donating a portion of your RMD to a qualified charity? This is known as a Qualified Charitable Distribution (QCD). A properly structured QCD not only helps you save on income taxes, it also can help minimize your taxable estate and fulfill philanthropic desires. You can make tax-free transfers of up to $100,000 from your IRA to qualified charities. With a QDC, you can exclude from taxable income any IRA funds directly transferred to a charity as an outright contribution. Here is how it works.
Potential Candidates for Making QDCs
Utilizing QDCs may be a great choice for you if you:
- Do not need all of the income from your RMDs
- Make charitable gifts, but don't itemize deductions (generally, only taxpayers who itemize get federal income tax-saving benefits from charitable deductions)
- Make large charitable gifts, but are unable to deduct all of them in a given year because of adjusted gross income limitations
- Want to avoid being taxed on your RMDs
How to Take Advantage of the QCD Rule
You may have your RMD made payable directly to the charity (assuming its meets the definition of a qualified charity), and then designate it as a qualified charitable distribution on your tax return. At this point, you will have satisfied your distribution requirement (RMD) and you won't have to pay income taxes on that money.
Limitations to Making QCDs
There are certain limitations that apply to these nontaxable charitable distributions from an IRA:
- You must be at least 70½ years of age when the gift is transferred
- Total gifts cannot exceed $100,000 per year, per IRA owner or beneficiary (married taxpayers with separate IRAs can give up to $200,000 per year, but not more than $100,000 may be distributed from each spouse's IRA)
- Gifts must be made directly from your IRA to a public charity (i.e., they cannot be made to a private foundation, a supporting organization, or a donor-advised fund)
- To contribute from your IRA to a donor-advised fund, you will need to take your distribution, pay the income taxes and penalties, and then offset them with a contribution into your philanthropic account
- The gifts must be outright (i.e., they cannot be used to establish a charitable gift annuity or fund a charitable remainder trust)
- Transfers must come from the IRAs directly to the charity; if you have retirement assets in a 401(k) or 403(b), for example, you must first roll those assets into an IRA, and then make the transfer from the IRA directly to the charity
- You cannot do a QCD from a SEP-IRA or SIMPLE IRA
Tax Implications for Making a QCD
- Federal – You do not recognize the transfer as income as long as it goes directly from the IRA to the charity. However, you are not eligible for an income tax charitable deduction.
- State – State laws vary, so you should check with your legal counsel or financial advisor.
To find out if a QCD is right for you, feel free to contact the attorneys at Butterfield Schechter LLP to assist you in making the right decision.