As we move toward year-end, many people are in the giving spirit. They are looking for ways to make an impact while also managing their tax burden. For IRA owners aged 70½ and older, a Qualified Charitable Distribution (QCD) can be a strategic way to accomplish both. At RFG Wealth Advisory, we understand the complexities of charitable giving and retirement planning, and we’re here to help you navigate these opportunities so you can give back in a meaningful and tax-efficient way. Giving potential and tax savings can both be accomplished through this strategy.
What is a Qualified Charitable Distribution (QCD)?
A QCD is a direct transfer of funds from your IRA to a qualified charity. For those who are 70½ or older, it’s a valuable option because it can reduce your taxable income while supporting a cause you care about. Even though the age for Required Minimum Distributions (RMDs) has increased to 73 under recent legislation, the ability to make a QCD remains available starting at age 70½.
Why Consider a QCD?
There are several advantages to using a QCD as part of your charitable giving and retirement income strategy:
Reduce Your Taxable Income: A QCD reduces the amount of your IRA balance without increasing your taxable income. Since the distribution goes directly to a charity, it’s not counted as part of your Adjusted Gross Income (AGI), which can also help you avoid Medicare surcharges and potentially lower your taxable income.
Fulfill Your RMD Requirements: If you’re age 73 or older and are required to take minimum distributions from your IRA, a QCD can satisfy all or part of that requirement. This not only helps you meet your RMD obligations but does so in a way that supports the causes you care about, all while providing potential tax benefits.
The Rules and Limitations of QCDs
- Eligibility: Either an IRA owner or a beneficiary can make a QCD. However, you must be at least age 70½ at the time of the transaction. Merely turning 70½ later in the year isn’t enough; you need to have already reached that milestone at the time you initiate the QCD.
- Eligible Accounts: QCDs can be made from a traditional IRA, an inactive SEP or SIMPLE IRA. They can also be made through a Roth IRA. The use of Roth funds is rare because only pre-tax amounts can be used. The transfer must be a direct transfer to the charity—checks written from a “checkbook IRA” or directly payable to the charity will qualify. However, if the IRA owner receives a check payable to themselves and later gives those funds to a charity, it won’t count as a QCD.
- Qualified Charities: It’s essential that your QCD goes to a qualified charity. This excludes donor-advised funds or private foundations. In 2024, a QCD of up to $53,000 to split-interest entities is allowed, but remember, this can only be done once in your lifetime. If you make a QCD to a charity with an outstanding pledge, it will still qualify and will not create a prohibited transaction.
- Limits and RMDs: A QCD can be used to satisfy your RMD. However, it isn’t limited to just the amount of the RMD. The total amount is capped at $105,000 per year. If your RMD exceeds $105,000, any amount beyond the QCD limit will be taxable as income. Additionally, QCDs are now allowed before the first RMD year at age 73.
- Tax Reporting: The IRA custodian doesn’t provide special tax reporting for QCDs. They are reported as a regular distribution on Form 1099-R. It’s up to you to correctly report the QCD amount on your tax return. The benefit is that the QCD amount is excluded from your taxable income. However, you cannot also take a charitable deduction for the amount of the QCD.
Getting Started with a QCD
If you’re considering making a QCD, we’re here to guide you through the process. We’ve developed a detailed guide, “Navigating Qualified Charitable Distributions in 5 Easy Steps”. This guide will help you understand the requirements and maximize the benefits of your charitable giving. You can download it below.
Contact Us Today for Personalized Advice
Every individual’s financial situation is unique, and navigating the world of QCDs requires a tailored approach. If you have any questions or want to discuss how a QCD could fit into your overall financial plan, call us today. Contact our lead advisor Chris Robinson, ChFC, at 940-464-4104. You can also book a free assessment online at https://RFGWealthAdvisory.com/free-assessment.
At RFG Wealth Advisory in Argyle, Texas, we always put our client’s interest first. As a fee-only, independent Registered Investment Advisor firm we provide a simple, transparent fee structure for your peace of mind. Feel confident that you’re getting the best advice tailored to your needs.
Remember, financial success doesn’t happen by chance—it happens with thoughtful planning and expert guidance. Let us help you maximize your retirement and charitable giving opportunities today.
Investment advice offered through RFG Wealth Advisory, a Registered Investment Advisor.
