Are you charitably inclined and fortunate enough to not need distributions from your IRA? Have you considered meeting your required minimum distribution (RMD) requirements by giving to your favorite charities and avoiding the increase to your tax bill? This can be accomplished by a strategy in which a qualified charitable distribution (QCD) is made from a traditional IRA.
What is a QCD (Qualified Charitable Distribution)?
Funds distributed to the IRA owner to satisfy the RMD are considered ordinary income and can move the taxpayer into a higher tax bracket. A QCD is an IRA withdrawal that is paid directly from your IRA to a qualifying charity. In 2015, Congress made the QCD a permanent rule that allows owners of traditional IRAs to exclude RMDs from their adjusted gross income (AGI) if the funds are distributed to qualified charitable organizations. This is advantageous, because along with your tax bill being lowered, AGI is used for many tax calculations. A lower AGI allows you to stay in a lower tax bracket, reduce or eliminate the taxation of Social Security or other income, and remain eligible for deductions and credits that might be lost if you had to declare the RMD amount as income.
Rules to consider for making a QCD:
- You must be 70.5 or older.
- The maximum annual amount that can qualify for a QCD is $100,000. You may make distributions to more than one qualified charity, but the sum must be $100,000 or less. (If filing jointly, a spouse may also make another $100,000 from their IRA).
- To qualify as your RMD, the QCD must be distributed by the year end.
- Any amount donated above your RMD does not count toward satisfying a future year’s RMD.
- Confirm that the receiving charity is a 501(c)(3) organization like the Heritage Foundation eligible to receive QCDs. Private foundations and donor advised funds do not qualify.
- The distribution must be made from a traditional IRA, not a Roth, 401K or similar retirement account.
- The distributions must be made directly to the charity, not to you. If the check is made out to you and not to the charity it is counted as a taxable distribution.
- Remember to receive a receipt or other type of acknowledgement of donation.
If you do not need your RMD from your IRA and want to support wonderful charities, like the Heritage Foundation and its 1799 Society, using this strategy is an excellent option to fulfill your philanthropic goals. Your tax professional can help you determine if this strategy is a good fit for you.
Feel free to email me if you have any questions.
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