Qualified Charitable Distributions (QCD’s): A Little-Known Tax Strategy

Taxpayers are required to take a minimum distribution (RMD) from your IRA each year beginning in the year you turn 70 ½ (this rule doesn’t apply to a Roth IRA). Normally, the custodian of your IRA will send you a letter in the year you turn 70 ½ stating the required minimum distribution (RMD) amount. Failing to withdraw the required amount results in a 50% penalty.

One tax strategy is to make a Qualified Charitable Distribution (QCD). A QCD is a non-taxable distribution that is directly transferred from your IRA account to a qualified 501 (c)(3) charity. You can’t withdraw it and then contribute it to the charity. It must be a direct transfer from the IRA to the charitable organization. A QCD can satisfy all or part of the RMD.

Example:

  • RMD is $10,000, Taxpayer makes $5,000 QCD, Taxpayer must still withdraw another $5,000 to fully satisfy the RMD, and the $5,000 from the QCD would be non-taxable, the other $5,000 would be taxable

Requirements for QCDs:

  • Taxpayer must be at least 70 ½
  • Limited to the amount that would otherwise be taxed as ordinary income
  • Max QCD amount is $100,000 in any year
  • Must be transferred to a qualified charity by the RMD deadline
  • Eligible IRAs include: Traditional, Rollover, Inherited, SEP, and SIMPLE

QCD’s can be a great tax planning strategy if you don’t want to take money out of your IRA once you reach 70 ½ because of tax consequences. The QCD can be used to fully satisfy the RMD which reduces taxable income and could also affect the taxability of social security, as well as certain deductions and credits.

Please give us a call at 260-407-5000 and talk to your CPA if you have any questions at all!

Tanner Roberson

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