By: AnnaMarie Mock, CFP®
What is a QCD?
A Qualified Charitable Distribution, QCD, is one of the most tax efficient methods of donating for individuals above the age of 70 ½ that are charitably inclined.
Under this method, individuals age 70 ½ or older can transfer up to $100,000 per year from their individual retirement account, IRA, to a charity. Keep in mind the age to begin required minimum distributions, RMDs, has been increased to age 72 by the SECURE ACT which took effect on January 1, 2020 but does not affect the QCD age.
Benefits of a QCD
Amounts transferred to charities count towards satisfying the annual RMD. For example, John’s RMD is $100,000, and he usually donates $20,000 to his favorite charity. If John chooses to do a QCD, his adjusted RMD would be $80,000. Keeping your taxable income lower may reduce the impact to certain tax credits and deductions, including Social Security and Medicare.
The QCD transfers are excluded from income. In the example above, John’s taxable income from his RMD is $80,000 versus the original $100,000 because the $20,000 transferred is not included as income.
You are not obligated to itemize your deductions in order to use the QCD. This provides flexibility as the QCD is additive to the standard or itemized deduction whichever is used on your return.
Any charity registered as a 501(c)(3) organization qualifies for the tax-deductible contributions. There are many resources available to evaluate an organizations mission and status; Guidestar and Charity Navigator are among the top tools.
Things to Keep in Mind When Considering a QCD
The eligible amount for a QCD is $100,000. For example, Mary’s RMD is $120,000, so only $100,000 can be transferred to a charity to get the tax-free treatment.
The donation must be transferred directly from your IRA to the charity. Usually, a check is issued from the IRA made payable to the charity. If you take possession of the withdrawal meaning the check is made payable to you, it negates the QCD and will be treated as taxable income.
A QCD is reported by the custodian as a normal distribution on Form 1099-R. You should keep the acknowledgment of the donation letter by the charity and even copies of the checks for your tax records. Consult with your accountant as to the proper way to report it.
Although QCD is a good strategy; the benefits of doing the QCD may have been diminished for some in 2020. The CARES Act enacted on March 27th eliminated all RMDs for all account owners and beneficiaries with inherited accounts for 2020. Therefore, no RMDs are required to be taken this year.
For individuals that do not rely on their RMDs for their lifestyle expenses or have access to monies in other account types (i.e. taxable brokerage or Roth IRAs), you may not want to continue with the QCD for 2020. Instead, it may be advantageous to forgo the QCDs and donate to the charities directly from your own income for 2020. By doing so, you may be able to itemize the donation on your tax return and utilize the deduction. We recommend speaking to your accountant for specific tax benefit information regarding your personal situation.
It is possible to ‘return’ the RMD into the retirement account if the 2020 RMD has already been paid out. If the distribution happened within the last 60 days, the amount withdrawn can simply be transferred back into the account. Inherited IRA owners that took the RMD for 2020 will not have the ability to return the money.
Author’s Bio
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.