If you’re looking for ways to use your IRA funds, you may consider a Qualified Charitable Distribution (QCD) as a way to meet your required minimum distribution (RMD).
Outside of the good feeling that comes from contributing to a worthy cause, one of the main benefits of a QCD is that it allows you to exclude the amount donated from your taxable income. Additionally, this amount doesn’t require itemization, which can bring a bit of relief to your overall numbers come tax time.
Of course, not all IRAs and investors qualify for QCD contributions. Read on to learn whether your situation is ideal for a QMD.
In order to make a charitable distribution with your IRA funds, your IRA needs to fall into one of the following categories:
- Traditional IRA
- Inherited IRA, including inherited Roth IRA
- SEP IRA
- SIMPLE IRA
Additionally, you need to be above the age 70.5 at the time that you plan to make a charitable distribution and, in the case of SEP or SIMPLE IRAs, must be no longer receiving employer contributions in order to qualify.
While giving away your funds in the form of QCDs is a strategic way to meet your RMD, enjoy accompanying tax benefits, and benefit from giving to charity you cannot exceed a certain giving threshold. For couples, the QCD cannot exceed $200,000; for singles, the QCD must remain under $100,000.
Charitable distributions are intended to be just that: charitable.
In order to verify the eligibility of a recipient organization, your QCD recipient must not be a private foundation or donor-advised fund. In general, most 501(c)(3) organizations qualify to receive QCDs. If you have a question about a particular charity, consult a financial professional to learn whether it qualifies for your donation.
Working Through the QCD Process
Once you’ve got an approved charity and know that your IRA funds are eligible for distribution, you’ll begin the QCD process to release the funds to the charity of your choice. Here’s how the process works:
Step One: Coordinate with Your RMD
You will want to distribute funds to a charity through QCD during the same year as your RMD. Ensure that you establish the proper timing for this distribution to coincide with your RMD in order to avoid penalties for missing your applicable deadlines or withdrawal requirements.
Step Two: Communicate with Your IRA Custodian
Your IRA custodian can help you to put your QCD plan into action, but there is some information that you need to communicate to get the process started. You need to submit your request in writing and need to specify the dollar amount you’d like set aside for QCD. Additionally, you should request this check be made payable to your charity of choice but mailed to you.
Step Three: Send the Funds to Your Chosen Charity
Once you receive the check, you can then forward it to the charity you’ve chosen. When you send the check, be sure to request a receipt so that you can update your tax records accordingly.
Step Four: Keep Your Tax Info Straight
When you file taxes for the year of your QCD, you will need to report the donation on your 1040 form. You can enter the donation amount on line 15a and put $0 for line 15b. Take care to note QCD.
Planning for Retirement
Whether you’re setting up an IRA or want to learn more about your options for taking your RMD, a financial advisor can offer personalized support for working through your retirement strategy. Contact Certified Financial Planner Jacob Sturgill to learn about how retirement planning can help you make the most of your future.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.