Charitable Giving Strategy: Qualified Charitable Distribution (QCD) – 2022

by | Dec 26, 2022 | Estate Planning, Tax Planning | 0 comments

For many, making an impact is a major financial goal. There are causes they believe in, and they want to give as much as possible. But unfortunately, many of these same people are  unaware of the tools they have at their disposal.

One of these tools may be a qualified charitable distribution (QCD). And it can be leveraged depending on how you (or a loved one) has already saved for retirement.

In this article, we’ll cover what a QCD is, what rules are involved, what benefits are offered, and how you can get started using one.

What is a Qualified Charitable Distribution (QCD)?

Generally speaking, a qualified charitable distribution (QCD) is a tax-free distribution that goes directly from an IRA to an eligible charitable organization.

QCDs are useful because, depending on your retirement account type (ex: traditional IRA), your distributions may be treated as taxable income. And that taxable income may be mandatory through required minimum distributions (RMDs) after you reach a certain age (usually 72, but can be 70 ½ depending on when you were born).

However, with a QCD you’re able to take advantage of a tax-sheltered transference of wealth to the causes you support. You and your retirement account will just have to meet certain criteria.

Qualified Charitable Distribution (QCD) Rules

QCDs have an array of rules that must be followed in order to use them. One of the most stringent is in regards to your age. In order to use a QCD, you must be at least 70½ years old on the day your distribution is made.

On top of that, the amount you can distribute through a QCD is not unlimited. The amount of your QCD cannot exceed the amount that would otherwise count as your income.

There is also a maximum annual exclusion of $100,000 (if you’re filing a joint tax return, your spouse can give this amount too). Any amount that goes over this exclusion is included in your income, and will be taxed like a normal distribution.

Please Note: QCDs cannot come from ongoing SIMPLE IRAs or SEP IRAs. Exceptions can be made through the proper pausing of contributions and account rollovers. But it’s worth taking the time to get in touch with a financial professional to work out the more complex details.

Other Commonly Asked Questions About QCDs

Can I make a QCD from an Inherited IRA?

Yes. Beneficiaries of inherited IRAs can make QCDs. However, they must still be 70 ½ years old (or older) to do so.

Can a QCD Come from a 401(K)?

No. QCDs must be made from an appropriate IRA. However, money rolled over from a 401k into an IRA may eventually be used for a QCD.

Do I Have to Itemize to Deduct a QCD?

No. You cannot claim QCDs as tax deductions. However, you can still lower your taxable income by having the distributions go directly to the qualifying organization(s).

Can I donate stock for a QCD?

No. QCDs are not a vehicle through which you can donate appreciated securities.

Does QCD count towards my RMD?

Yes. You can use QCDs to offset RMDs, but there’s a limit. QCDs max out at the $100,000 annual exclusion, so RMDs that exceed that amount will still be treated as taxable income.

Benefits of Qualified Charitable Distributions

Maximize Your Charitable Impact: QCDs allow you to give more to the organizations you wish to support. That tax-sheltered transfer allows you to avoid paying taxes you would otherwise take on by taking the distribution directly, and then donating the cash.

Reduce Taxable Income: Instead of receiving distributions yourself, and bringing in a taxable income, you can have them go directly to the organization(s) of your choice and pay no taxes on the distributions.

Choosing the Charities You Support: QCDs allow you identify and support the specific causes you believe in.

Offsetting Your RMDs: If you’re subject to RMDs, a QCD can help you offset them. That’s because up to the $100,000 annual exclusion, your RMDs can be given straight to the charity(ies) of your choice tax-free.

How to Make a Qualified Charitable Distribution?

Once you determine your eligibility for a QCD, you may feel ready to get started. Thankfully, setting up and utilizing a QCD is rather simple. Below, we’ll walk you through what the process will look like:

Step 1: Make sure the organization(s) you’re looking to support is a qualifying charity under the Internal Revenue Code § 170(b)(1)(A).

Step 2: Get in contact with your IRA’s custodian, and tell them you’re looking into making a qualified charitable distribution.

Step 3: Make your official written request for a QCD.

Step 4: Specify the dollar amounts you want to donate to your eligible organization(s).

Step 5: Ask that the check(s) be made payable to the organization(s), but be sent to you.

Step 6: Keep the receipts and records for your future tax filing.

Please Note: If you’re still feeling overwhelmed, don’t worry. You can reach out to us, and we can help you with this process.

How Vertical Wealth Management Can Help

At Vertical Wealth Management, it’s a privilege to help our clients make an impact. And with qualified charitable distributions, that impact can be amplified. That’s because they allow you to give directly to the causes you care about in a tax-savvy way.

QCDs can be used to offset the RMDs of your retirement account, lower your taxable income, and avoid a tax hit before donating to charity. And they’re a worthwhile vehicle to look at assuming you, your charity, and your retirement account meet the proper criteria.

As a team, we can review if a QCD is a strategy that’s right for you. If it is the right strategy, we can also help guide you through the process of giving through one.

If you’re interested to learn more about QCDs, or are ready to begin leveraging them to your advantage, please don’t hesitate to reach out. You can schedule your free consultation call today, and find the distribution strategies that are best for you.