For people who already give to charity, how the gift is made can matter almost as much as how much is given.
A qualified charitable distribution, or QCD, is a way for eligible IRA owners to send money directly from an IRA to a qualified charity. That change in the path of the money can affect how the distribution is treated for tax purposes.
A QCD generally moves money directly from an eligible IRA to a qualified charity. The word directly matters. The money is not first distributed to the IRA owner, deposited into a checking account and then given away later. To receive the intended tax treatment, the distribution must follow the applicable requirements.
Age is one of those requirements. QCD eligibility begins at age 70½. That age is separate from the age when required minimum distributions, or RMDs, begin. Someone may become eligible to make a QCD before being required to take an RMD.
Consider two ways to make the same charitable gift. Suppose someone over age 70½ already plans to give $10,000 to qualified charities during the year. One option is to take $10,000 from a traditional IRA and then give that money to charity. The IRA distribution generally counts as taxable income, and the person may receive a charitable deduction depending on the tax situation. However, not everyone itemizes deductions.
With a properly completed QCD, that same $10,000 may go directly from the IRA to the charity and generally may be left out of taxable income. The donor does not also deduct the same $10,000. The goal is not to receive two tax benefits from one gift. It is to consider whether there is a more intentional way to fund a gift that was already going to be made.
QCDs can become especially important once RMDs begin. Some retirees are required to take money from retirement accounts even when they do not need all of it for living expenses. If charitable giving is already part of the plan, a QCD may be able to satisfy all or part of an RMD.
Important questions to review each year include:
- Are you eligible to make a QCD?
- Do you already plan to give to charity?
- Are you required to take an RMD?
- Are you itemizing deductions?
- What other income do you expect during the year?
- Are other planning opportunities competing for the same IRA dollars?
A QCD does not automatically make sense every year. Income, charitable giving, RMDs and other planning decisions can change. That is why the decision belongs in an annual tax plan rather than being treated as a one-time strategy.
Timing and coordination matter. The age requirement must be met, the money must come from an eligible account, the receiving organization must qualify, and the distribution must be handled properly. Keep the right documentation and make sure the person preparing the tax return understands what occurred. A distribution leaving an IRA does not by itself tell the full story of how it should be treated for taxes.
Tax preparation records what already happened. Tax planning gives you an opportunity to decide what happens before the year is over. For someone who already gives to charity, the larger question is not only how much to give, but where that money should come from. Depending on the year, that could be cash, appreciated investments or a QCD through an IRA.
The key is to make charitable giving part of a coordinated annual plan rather than assuming the same account should fund every gift every year.
Financial Enhancement Group is an SEC Registered Investment Advisor.
This content is for educational purposes only and is not intended to be financial, investment, or tax advice. Please consult with a qualified advisor regarding your specific situation.
