Qualified Charitable Distributions: A Tax-Smart Way for Retirees to Give
Many retirees want to contribute to charity but are hesitant because of their limited incomes. However, there is a special tax provision that allows retirees over age 70.5 to make tax-free charitable donations directly from their IRAs. For those age 73 (75 for those born in 1960 or after) , these distributions can count towards their required minimum distribution (RMD) . These are known as qualified charitable distributions (QCDs).
First, an RMD is the minimum amount that IRA owners must withdraw each year starting at age 73 based on IRS life expectancy tables. Failure to take RMDs results in a 25% penalty on the amount not withdrawn as required. QCDs provide a way to meet your annual RMD in a tax-advantaged manner.
A QCD allows IRA owners 70.5 or older to donate up to $100,000 tax-free from their IRA each year. This applies to traditional IRAs. The distribution goes directly to a qualified charity so you never receive the money or report it as income. If you’re taking an RMD, it’s OK if you want to keep some of your RMD for living expenses and donate the rest through a QCD or you could donate the entire amount due. It’s up to you!
For example, if you took a $10,000 RMD and were in the 22% tax bracket, you would pay $2,200 in federal income taxes. If you then donated the remaining $7,800 to charity, the effective cost of your donation would be $10,000. With a QCD, the full $10,000 goes to charity tax-free and you avoid counting it as income. This could unlock additional tax benefits such as avoiding Medicare taxes or lowering your capital gains tax rate for the year (depending on your specific situation).
Key Benefits of a QCD:
- It counts toward your RMD for the year but is not included in your adjusted gross income. This may help lower your tax bracket and avoid triggering higher Medicare premiums or other income-related costs.
- You don't receive a charitable deduction since the distribution doesn't count as income. But this may work out better by providing a tax break while allowing you to still claim the standard deduction.
- The money goes straight to the charity.
The charity receiving the funds must qualify as a 501(c)(3) organization to accept a QCD. Some common recipients include religious groups, veterans organizations, food banks, hospitals, universities and more. Be sure to receive proper documentation from the charity for your records.
QCDs provide retirees a simple, hassle-free option for meeting RMDs in a tax-friendly way while supporting worthwhile causes. Just be sure to coordinate the distribution with your IRA custodian and allow enough lead time before the RMD deadline. Consulting your tax advisor or financial planner to help determine if a QCD aligns with your financial situation.