By Terry Prather, CFP®
The Tax Cuts and Jobs Act of 2017 introduced a charitable giving strategy that is particularly beneficial for retirees hoping to make an impact while also reducing their tax exposure. A qualified charitable distribution (QCD) allows you to make a direct transfer from your tax-deferred retirement account to a charitable organization of your choice without being subject to income tax. Doing so allows you to lower your taxable income while maximizing the impact of your charitable donation.
QCDs and RMDs
Beginning at age 73 (for those born between 1951 and 1959), retirees must withdraw a portion of their tax-deferred retirement savings each year as a required minimum distribution (RMD). These withdrawals are taxed at ordinary income rates, which can lead to significant tax liabilities. Retirees who do not rely on retirement plan withdrawals to cover their living expenses may wish to reduce their tax exposure, and QCDs offer an opportunity to do so.
In 2024, retirees over age 70 ½ can donate up to $105,000 per year from a retirement account directly to a charity with no negative tax impact. The amount donated counts toward the annual RMD, but QCD assets are not added to the retiree’s taxable income. This can be a winning situation for both the charity and the taxpayer.
What are the benefits of a QCD?
There are several main benefits of making a QCD:
- Charitable impact – First and foremost, QCDs allow you to support charitable causes that are important to you. Compared to making a donation with after-tax funds, a QCD allows you to contribute more to your charity of choice.
- Reduced tax exposure – Because the assets are not viewed as taxable, a QCD has the potential to significantly lower the amount you owe in taxes.
- Enhanced benefit eligibility – Certain retiree benefit phaseouts are based on adjusted gross income (AGI). Withdrawing assets as an RMD increases your AGI, which can reduce your benefits eligibility. However, making a QCD has no impact on your AGI. This means you may qualify for additional retiree benefits, such lower Medicare premiums, net investment income and certain tax credits.
- The QCD limit is per individual – The $105,000 QCD limit is per individual taxpayer, which means a married couple filing jointly can donate up to $210,000 per year as a QCD.
- No itemization – QCDs are excluded from your taxable income, which means you do not need to file an itemized tax return in order to benefit from this strategy.
How does a QCD work?
As the qualified retirement account holder, you instruct the financial institution to issue payment as a QCD directly to the charitable organization(s) of your choice. It is very important to ensure payment is issued directly to the charitable organization, as QCD tax benefits will not apply if the payment is issued in your name. It is also important to maintain documentation of the transfer to the charity, as you will need to submit proper reporting when you file your annual tax return.
What are the requirements for a QCD?
- You must be age 70 ½ or older before the distribution is made.
- The QCD amount is limited to the amount that would otherwise be distributed to you as taxable income.
- The maximum exclusion is limited to $105,000 (in 2024) per individual, per calendar year ($210,000 per married couple, per year).
In summary, a QCD can be a tax-efficient method of making charitable donations in retirement. If you are interested in exploring how to take advantage of this giving strategy, we would love to have a conversation. To learn more about how United Capital Financial Advisors can help you plan for the future, please contact us.
Terry Prather, CFP® is a Wealth Advisor at United Capital Financial Advisors
