What are Qualified Charitable Distributions (QCDs), and why are they so popular?
QCDs minimize the tax effects of distributions from your Individual Retirement Account, while benefiting an organizaiton like NSRWA.
What Are Required Minimum Distributions (RMDs)?
Required Minimum Distributions (RMDs) are the minimum amounts you must withdraw annually from certain retirement accountsucs, such as traditional IRAs and 401(k)s, once you reach age 73 (or 75 for some, depending on birth year, per SECURE Act 2.0). These withdrawals are taxed as ordinary income. Many people take all that income, after tax, even when they don’t need it.
What if you don’t need all the money represented by your RMD? Is there any way you can reduce what you personally receive without penalty?” Yes! Read on.
Taxes and Qualified Charitable Distributions (QCDs)
A QCD allows individuals age 70½ or older to donate up to $100,000 per year directly from their IRA to a qualified charity such as NSRWA. The donation counts toward your RMD but is excluded from your taxable income.
💡 Key Tax Benefits of a QCD
- Reduces taxable income: Unlike regular charitable donations, QCDs come directly off the top of your IRA without ever hitting your taxable income.
- No need to itemize: QCDs provide a tax benefit even if you take the standard deduction.
- Can lower Medicare premiums: By reducing your adjusted gross income (AGI), a QCD can potentially reduce income-based Medicare surcharges (IRMAA).
- Avoids percentage limitations: Unlike regular donations (which are capped at 60% of AGI for cash), QCDs have a separate $100,000 cap per person.
Example
Jane is 74 and must take a $25,000 RMD this year. She doesn’t need that entire amount, and she wants to support NSRWA. Instead of taking the full RMD as income, Jane donates $10,000 directly from her IRA to NSRWA via a QCD. She now only reports $15,000 as taxable income, lowering her tax liability while supporting a cause she values.
Benefits to the Donor, using the above example:
- Tax Advantages: The $10,000 QCD counts towards the required minimum distribution (RMD) that Jane must take from her IRA. Since she does not receive the money directly, it is not considered taxable income. This helps reduce her overall taxable income for the year.
- Avoiding Higher Tax Bracket: By reducing her taxable income through the QCD, Jane may avoid pushing herself into a higher tax bracket. This can also help minimize the taxes on her Social Security benefits and the Medicare premiums she may need to pay next year.
- Fulfillment of Charitable Goals: The QCD allows Jane to support a cause she cares about, in this case, healthy water, while also managing her tax situation effectively.
- Simplicity: QCDs simplify the process of donating to charity since the funds go directly from the IRA to the charity, eliminating the need for Jane to withdraw the amount first and then allocate the funds for donation.
In summary, a QCD provides significant tax benefits for eligible IRA holders while allowing them to fulfill their philanthropic goals efficiently.
✅ How to Make a QCD
- A QCD must be from a traditional IRA (not 401(k)s unless rolled over into an IRA).
- Must be paid directly to a qualified charity such as NSWA (donor-advised funds and private foundations don’t qualify for this strategy).
- Must be completed by December 31 to count for the current tax year.
- Instructions to your IRA custodian must be provided by you, typically using the custodian’s forms, and the payment will go directly from your custodian to NSRWA. For assitance with payee, address or ACH instructions, please contact Joe Regan, joe@nsrwa.org
The content here is provided as a guide to help laypeople understand some of the fundamentals of tax-efficient giving based on current laws and regulations which may change without notice. Content here should never be considered or counted on as professional advice. Always seek qualified advice from legal, tax, and accounting professionals for your own personal situation.