A Qualified Charitable Distribution (“QCD”) can be a very effective and tax-efficient way to donate to your favorite charity from your IRA. A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met:
- You must be 70½ or older to be eligible to make a QCD.
- QCDs are limited to the amount that would otherwise be taxed as ordinary income. This excludes non-deductible contributions.
- The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. (If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.)
- For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, generally December 31.
- Contributing to an IRA may result in a reduction of the QCD amount you can deduct. (The aggregate amount of deductible IRA contributions you make to your IRA after you turn 70 1/2 will reduce the amount of the QCD that is not includible in your gross income.)
Have you recently found out you are eligible to make a QCD from your IRA? In addition to giving to your favorite charity, being eligible for a QCD includes these benefits:
- Satisfying your required minimum distribution obligation for the year.
- Not having to itemize your tax deductions.
- A QCD also excludes the amount donated from taxable income which can reduce the impact of certain tax credits and deductions, like Social Security and Medicare.
What kind of charities qualify?
- The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions.
Some charities do not qualify for QCDs:
- Private foundations
- Supporting organizations: i.e., charities carrying out exempt purposes by supporting other exempt organizations, usually other public charities
- Donor-advised funds, which public charities manage on behalf of organizations, families, or individuals
If you are eligible, there is a procedure to follow to ensure your QCD is processed correctly. Not sure where to start? Here is the typical step-by-step process for making a QCD:
- Communicate with your IRA’s custodian (where your IRA is held) that you are interested in making a QCD(s).
- Make the request for a QCD(s) in writing.
- Specify the dollar amount that you wish to contribute to each individual charity.
- Request the check be made payable to the charity(ies) but be mailed to you.
- Forward the check to the charity(ies) and request a receipt for your records.
- Maintain the receipt(s) and records in your tax file.
- Report the QCD amount on your 1040 federal tax return.
- Enter the total amount(s) on line 4a of your 1040 federal tax return.
If you have questions on whether your IRA or charity meets the eligibility requirements for a QCD, please contact your advisor or start here.