Investing by Design

Reduce Taxes And Increase Impact With Qualified Charitable Distributions From Your IRA And 401(k)

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Michael Allbee, CFP

Senior Portfolio Manager
Benefit Financial Services Group (BFSG)
Office : (714) 282-1566
Schedule a meeting

Qualified Charitable Distributions (QCDs) offer a powerful way to reduce your tax burden required minimum distributions from IRA and other pre-tax accounts while making a difference in your community. This strategy is open to individuals aged 70½ and older to combine retirement planning with philanthropy. With recent updates under SECURE Act 2.0, the strategy has become even more beneficial. Here's some keys you need to know about how QCDs work, who can use them, and the steps to take advantage of this financial planning opportunity.


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What Is a QCD?

A QCD allows individuals to donate directly from their Individual Retirement Account (IRA) to a qualified charity, bypassing the need to report the distribution as taxable income. Each year, you can contribute up to $105,000 from an IRA. For a married couple, if both spouses are age 70½ or over when the distributions are made and both have IRAs, each spouse can exclude up to $105,000 for a total of up to $210,000 per year.

The key benefits include:

1. Satisfying Required Minimum Distributions (RMDs) without increasing taxable income.

2. Reducing Adjusted Gross Income (AGI), which may lower Medicare premiums and other taxes.

3. Supporting the causes you care about most in a tax-efficient manner.

Updates Under SECURE Act 2.0

SECURE Act 2.0 introduced inflation adjustments for QCD limits starting in 2024. It also allowed IRA owners to fund life income gifts, such as Charitable Gift Annuities (CGAs) or Charitable Remainder Trusts (CRTs), directly from their QCDs. This unique provision enables retirees to support charities while receiving income back from their gift—a win-win for philanthropically minded retirees.

Who Can Use a QCD?

To qualify for a QCD, you must meet specific criteria:

1. Age Requirement: You must be 70½ or older.

2. Eligible Accounts: Traditional IRAs, inactive SEP IRAs, and inactive SIMPLE IRAs are eligible. Active accounts receiving employer contributions, 401(k)s, or 403(b)s are not.

3. Direct Transfers: Your IRA custodian must transfer the funds directly to the qualified charity.

Steps to Execute a QCD

1. Determine the Amount: Decide how much you want to donate, up to $105,000 annually (or $210,000 per household).

2. Contact Your IRA Custodian: Request a transfer in writing, specifying that the check be payable to the charity.

3. Document the Transaction: Retain records for tax reporting purposes. On Form 1040, reduce your taxable IRA distribution by the amount of your QCD. In early 2025, the IRA owner will receive Form 1099-R from their IRA trustee that shows any IRA distributions made during calendar year 2023, including both regular distributions and QCDs. The total distribution is shown in Box 1 on that form. There is no special code for a QCD.

Tax Benefits of QCDs

One of the most significant advantages of QCDs is the potential to lower your AGI, which can have a cascading effect on other taxes:

- Potentially Lower Medicare Premiums: AGI reductions may prevent you from hitting higher Medicare Income-Related Monthly Adjustment Amount (IRMAA) thresholds. The first threshold for Singles is $103,001, $206,001 for Married Filing Jointly. For example, let’s say that you are Single, income of $100,000 and you have a $5000 required minimum distribution. That RMD would increase your income to $105,000, resulting in a monthly increase in Medicare Part A of $69.90 and Part B of $12.90. A QCD would allow you to avoid that increase.

- Potentially Reduced Social Security Taxation: With a lower AGI, less of your Social Security benefits may be subject to tax.

Sustainability and Social Impact

If you are social values and sustainability-minded, QCDs offer a way to align your financial goals with your personal values. By choosing charities that promote environmental, social, or community initiatives, you can amplify the impact of your giving.

Considerations Before Proceeding

Not all charitable organizations qualify for QCDs. For instance, donations to donor-advised funds or private foundations are ineligible. It's crucial to verify the recipient organization meets IRS guidelines.

Additionally, are not deductible as charitable contributions on Schedule A. Instead, the tax advantage lies in reducing your AGI. For individuals who take the standard deduction, QCDs are an excellent way to gain a tax benefit from charitable giving without itemizing.

Is a QCD Right for You?

QCDs work best for individuals who:

- Have RMDs they don't need for living expenses.

- Are charitably inclined and want to maximize the impact of their giving.

- No longer itemize deductions but still want tax-efficient giving options.

As a Certified Financial Planner and advocate for sustainable investing, I encourage you to consult a tax advisor and a financial planner to tailor QCD strategies to your unique financial goals.

Conclusion

Qualified Charitable Distributions allow you to make a meaningful difference while reducing your taxes. Unlike the RMD that is reduced by taxes, the full amount of your QCD goes to the charity, effectively increasing the amount of the same contribution. It is also a handy tool to help reduce potentially higher Medicare premiums as the RMD may graduate you into a higher Medicare premium tier. It is important to get advice from knowledgeable professionals to make sure that you execute this correctly to avoid unnecessary consequences from accidental blunders.

By James Brewer, Former Contributor

© 2024 Forbes Media LLC. All Rights Reserved

This Forbes article was legally licensed through AdvisorStream.

Michael Allbee profile photo

Michael Allbee, CFP

Senior Portfolio Manager
Benefit Financial Services Group (BFSG)
Office : (714) 282-1566
Schedule a meeting