IRAs, or Individual Retirement Accounts, are a common way to save for retirement. They are a great tool to put away money for your later years. There are a few different options when it comes to IRAs, traditional or Roth, and there are strategic ways to use the money in these accounts. One of these strategies is a QCD, or a qualified charitable distribution, for people over age 70 ½.
What are RMDs?
Before we talk about what a QCD is, we need to talk about IRAs. As mentioned, there are two different types of IRAs. With traditional IRAs, pre-tax money goes in, but when it is withdrawn, it is counted as income and taxes must be paid. With Roth IRAs, post-tax money is put in, so the distributions come out tax-free. The IRS has rules about when you must distribute money from traditional IRA accounts. These are called RMDs, or required minimum distributions.
RMDs are the withdrawals that the IRS requires from traditional retirement accounts after the age of 70 ½. Roth IRAs do not have RMDs. The amount of the RMD is based on your age and the amount of money in your retirement accounts. Withdrawals must be made by December 31st of every year. There is some leeway for the first year; the distribution can be deferred until April 1st. Not taking the appropriate RMDs results in a very large penalty: 50% on whatever the difference is between what you took out and what you were supposed to take. In addition to this penalty, you’ll still be required to take out the RMD and pay the appropriate taxes on it. QCDs are a way to avoid this penalty while also not increasing your taxable income.
What is a QCD?
A QCD, or a qualified charitable distribution, is a non-taxable donation made from an IRA to a charity. Basically, you are making a donation from an IRA instead of just writing a check from your bank account. QCDs can count for your RMDs and, if done correctly, never show up as income on your tax return. This makes it a great strategy to not only satisfy your RMDS but also to give to a cause that matters to you.
In order to take advantage of QCDs, you must be over the age that RMDs start, which is 70 ½. The maximum annual limit for QCDs is $100,000. If both spouses are 70 ½ and each has their own IRA, they can both take advantage of this $100,000, making it $200,000 for a couple. If you include more than $100,000 in your QCD, the excess is considered income and is taxed. There are other rules surrounding QCDs that are listed below.
What are the requirements for QCDs?
- The IRA owner must be at least age 70 ½. The QCD has to be made after they turn 70 ½.
- The donation cannot exceed $100,000 per year per person.
- The money must be donated to a 501(c)(3) organization. It cannot go to a private foundation or a donor-advised fund.
- The QCD must be made directly from the IRA to the charity. The check must be payable to the charity not the IRA owner.
- The donation must be made before December 31st to qualify for that year. Ideally, this is when the charity would cash the check, so make sure to send the check before December 31st to be safe.
What else should I know about QCDs?
While QCDs can be made from Roth IRAs, it does not make sense as this money was already taxed so you do not receive the same tax advantage as you would if using a traditional IRA. You also will not satisfy the RMDs required of any traditional retirement accounts you have if you do a QCD from a Roth IRA.
In terms of using QCDs to satisfy RMDs, it is important to know that RMDs are satisfied by the first distribution that comes out of the IRA for that year. That means that if you take a distribution and then decide you want to do a QCD, the first distribution will still count as income. You cannot go back and make that first distribution a QCD; that is not allowed.
Cardinal Advisors
In 2018 and beyond, it might be tax smart to shift your regular giving to go directly from your IRA to a charity. It can keep the income and the deduction from ever hitting your tax return. A QCD can be complicated and can cost a lot of money if done incorrectly. Make sure to consult a qualified professional before making any decisions. Cardinal Advisors can help you with IRAs, QCDs, and answering any questions that you might have.
Hans Scheil is the author of “The Complete Cardinal Guide to Planning for and Living in Retirement” and the accompanying workbook. He can be reached at Hans@CardinalGuide.com.
