If you want to help others and would like to get a tax break along with it, a Qualified Charitable Distribution (QCD) may be exactly what you are looking for. Ordinarily, all deductible contributions to a traditional IRA, plus earnings, are subject to federal income tax when they are later distributed. However, if the IRA owner meets certain requirements (see below), he or she may be able to transfer funds directly from the IRA to a qualified charity and consequently exclude the withdrawal from taxable income.
This is called a QCD. QCDs are reserved for those who meet certain requirements:
• The IRA owner must be age 70½ or older on the actual date of the distribution, even if they will be prior to year-end.
• Beneficiary and rollover IRAs are eligible, but active SEP and SIMPLE IRAs are not.
• The maximum distribution amount is $100,000 per year, per taxpayer. Married couples can utilize $200,000 worth of QCDs each year ($100,000 per spouse).
• The distribution must go to a public charity. A QCD cannot be made to a private foundation or donor-advised fund.
• The distribution must be one that would otherwise be eligible for a full charitable deduction.
One implication of this rule is that the donor must not receive any benefits from the charity in return for the donation. In addition, a charitable remainder trust or a charitable lead trust cannot be the recipient of a QCD. • The check must be made payable to the charity, not the IRA owner. QCDs are particularly popular in conjunction with Required Minimum Distributions (RMDs), which are mandatory withdrawals from retirement accounts for those age 70 ½ and older. One of the most favorable qualities of the QCD is that it can help to satisfy RMD obligations for the year without any tax consequences. Even though a QCD can be taken at any time during the year, if the goal of the QCD is to satisfy the individual’s RMD, the QCD should occur before any other distributions are taken from the IRA.
Editors Note: This article was submitted by Erin Weber. Erin is a Financial Advisor with The Weber Group at Hefren-Tillotson. She may be reached at 412-633-1671 or Erin.Weber@hefren.com.