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Consider taking a Qualified Charitable Distribution from Your IRA

Consider taking a Qualified Charitable Distribution from Your IRA

From time to time you may be inspired to do some good for others.  Perhaps the recent wildfires in California are a reason for you to want to help someone in need.  Coupled with that, you may also have a Required Minimum Distribution (RMD) that you have to take from your Individual Retirement Account (“IRA) because you are 70 ½ or older.  As we approach year-end, the December 31 deadline for you to take your RMD for 2018 is fast approaching.  One last acronym:  consider the Qualified Charitable Distribution (QCD).  QCDs only apply to IRAs, so if you have assets in a 401(k) or other plan and you would like to do what we describe below, you would have to rollover those funds to an IRA first.

A Qualified Charitable Distribution allows you to give up to a total of $100,000 of your RMD from your IRA directly to charities of your choice.  Besides fulfilling your philanthropic desires, a QCD gives you and your charity a tax advantage.  Note that you do not get a tax deduction.  Even better, the dollar amount of the RMD you donate to charities through a QCD is removed from your adjusted gross income for the tax year in which you make the donation.  The Tax Cuts and Jobs Act passed last year also made changes to the amount of a taxpayer’s standard deduction, reducing the potential for some taxpayers to take deductions for contributions they make to charities.  Therefore, the QCD is that much more attractive for taxpayers that are not going to itemize because they still have a strategy to use to reduce taxable income.  Your charity also does not pay income tax on the funds it receives.  To make a QCD, you must direct your IRA custodian to send your distribution directly to the charity, or their policy may be able to mail you a check payable to the charity for you to deliver. 

Unfortunately, a QCD is only possible up to the dollar amount of your RMD.  If you have already taken any portion of your RMD in 2018, in monthly and quarterly installments, or any portion, the Internal Revenue Service’s rules and regulations that apply disqualify you from making a QCD between now and year-end.  A QCD has to be the first distribution(s) you make from your IRA in any given year, up to the amount of your RMD, to qualify for tax free treatment.

Keep in mind that a QCD must be used for a 501(3) charitable organization, and there are plenty of organizations other than those providing relief to those affected by wildfires that you may believe are deserving.  Private foundations and donor advised funds do not qualify.  The distribution can occur at any time of the year, assuming you haven’t already taken a distribution, as discussed above.  If you cannot use a QCD this year, consider doing it starting January 1 to satisfy your 2019 RMD.  It is never too late to make a difference.

If you would like to discuss QCDs or your other financial planning needs, we would be glad to hear from you at 916-924-7527 or by completing the form on our website.  You can reach the author of this article, Rod Waterbury, also by email at rod@gbbwealth.com.

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