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Qualified Charitable Distributions

As we head into the year-end deadline for taking Required Minimum Distributions (RMDs), it is worth considering whether to make a Qualified Charitable Distribution (QCD).


What is a QCD?

A QCD is an IRA distribution that is sent directly to a qualified charity. Rather than taking a distribution and then making a charitable contribution (two transactions), a QCD is a single transaction from the IRA to the charitable organization.

Why Make a QCD?

Making a QCD may result in tax benefits to the IRA owner. The two primary benefits are:

  • If a taxpayer takes a normal distribution and then makes a charitable contribution for the same amount, he/she will offset the income tax. However, making a QCD and avoiding the income in the first place may positively impact other tax credits and deductions related to Social Security and Medicare.

  • Additionally, a QCD allows anyone to effectively receive a charitable deduction, whereas offsetting income with charitable contributions is only available to those who itemize their deductions.

Limitations and Other Considerations

There are some limitations and other considerations to be aware of. For instance:

  • QCDs are only available to those 70.5 or older, at the time of the distribution.

  • QCDs do count towards RMD, but any overage cannot be carried forward for use in future years.

  • The maximum annual exclusion for QCDs is $100,000.

  • The recipient must be a 501(c)(3), but cannot be a private foundation, split-interest charitable trust, supporting organization, or donor-advised fund (DAF).

Conclusion

Making a QCD is a valuable tax planning tool, for taxpayers that have charitable goals and meet the above criteria. However, making a QCD is not always the most beneficial course of action even if one can make a QCD. Alternative strategies such as donating appreciated assets may make more sense in any given year. We encourage investors to consult with their tax and financial advisors to determine the best strategy each year.