QCD – What’s It Mean?

Not only do we start to see the leaves falling away in October, giving way to a new season, a new chance to restart, but the days in the last three months of the year seem to fall off the calendar as well.  At Meridian, October is when we charge full steam ahead with end of year planning with our clients.   While year-end planning looks a little different for every client and for every calendar year (and certainly this year), there are several planning items that can achieve annual requirements and planning goals with a one fail swoop.

One of them being the utilization of a QCD – Qualified Charitable Distribution – from IRAs.  This is the process of sending a distribution from a pre-tax IRA directly to a charity.  While there are many benefits to doing this, Fidelity has laid out some good rules to follow:

  • You must be at least 70½ years old at the time you request a QCD. If you process a distribution prior to reaching age 70½, the distribution will be treated as taxable income.
  • For a QCD to count toward your current year’s RMD, the funds must come out of your IRA by your RMD deadline, which is generally December 31 each year.
  • Funds must be transferred directly from your IRA custodian to the qualified charity. This is accomplished by requesting your IRA custodian issue a check from your IRA payable to the charity. You can then request that the check be mailed to the charity, or forward the check to the charity yourself.
    Note: If a distribution check is made payable to you, the distribution would NOT qualify as a QCD and would be treated as taxable income.
  • The maximum annual distribution amount that can qualify for a QCD is $100,000. This limit would apply to the sum of QCDs made to one or more charities in a calendar year. If you’re a joint tax filer, both you and your spouse can make a $100,000 QCD from your own IRAs.
  • The account types that are eligible for QCDs include:
    • Traditional IRAs
    • Inherited IRAs
    • SEP IRA (inactive plans only*)
    • SIMPLE IRA (inactive plans only*)
  • 401ks / 403bs / 457s are not eligible for QCDs.
  • Certain charities are not eligible to receive QCDs, including donor-advised funds, private foundations, and supporting organizations. You are not allowed to receive any benefit in return for your charitable donation. For example, if your donation covers your cost of playing in a charitable golf tournament, your gift would not qualify as a QCD.

If you fit within those requirements and are charitably inclined, a QCD has many benefits.

Even though the SECURE Act 2.0 is in the works to extend the RMD age from 72 to later, Required Minimum Distributions are something that will more than likely never go away (with the exception of one off years like 2020). For retirees who have saved extensively into a pre-tax IRA, the RMD amounts can be huge, top that off with Social Security benefits and any other income you may be receiving (pensions, inherited retirement accounts, annuities, etc) and you could be pushed into a higher tax bracket before you know it. Higher tax brackets can adversely impact Medicare benefits and taxation of Social Security payments.

By sending a portion of or all your RMD directly to a charity, you satisfy the required annual distribution, but you will not have to report the distribution as taxable income and therefore will not owe taxes on it.  Plus, you fulfill your annual goal of giving! **Note —  “double dipping” is not allowed, so since you do not report the distribution as taxable income, you do not get to deduct the QCD.

In comparison, if you do not go the QCD route, but are RMD age and donate to charities annually, you would take the distribution from the IRA and report the distribution as taxable income and separately you would donate to charity reporting it as an itemized deduction… that is if you even break above the standard deduction. With the standard deduction as high as it is now, plus an additional $1,700 deduction for each filer 65 and older, many individuals will not itemize and therefore any tax benefit from donations is not fully realized.

The chart below breaks down three scenarios, with the third using both the QCD and utilizing a charitable itemized deduction.

Source: Fidelity

Another thing to keep in mind for QCDs – the timing is important.  QCDs do not “cancel out” RMDs that have already been fulfilled.  Instead, they are categorized as an additional distribution which is not reported as taxable income.  For example, if an individual has an RMD that is $10,000 and they take their RMD earlier in the year, but then decide later in the year they want to reduce their RMD income with a QCD of the same amount, it’s too late.  If the funds from the retirement account are not needed to support retirement cash flow, a QCD should be done first to fulfill the required annual distribution amount or in tandem with the RMD if the donor wishes to donate only a portion of their annual distribution.

For tax filing purposes, QCDs are reported by most custodians as a normal distribution the 1099-R form, so it is important to loop in your tax professional to ensure they have the proper proof.  Your advisor at Meridian is always happy to work with you and your accountant if you are considering integrating a QCD into your year-end / retirement planning strategy!

Much like trees in the fall season shedding their leaves for new beginnings, donating your Required Minimum Distribution sheds some tax burden and redirects funds towards another season at your favorite charity.


“We Can Do It!” – Mi Cha and Rosie referring to Meridian helping our client’s with their QCDs.
Categories : Financial Planning

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