What is a Qualified Charitable Distribution (QCD)?

A Qualified Charitable Distribution (QCD) is a tax-savvy way for individuals aged 70½ or older to donate to a charity directly from their IRA (Individual Retirement Account). This method allows you to transfer up to $100,000 annually ($200,000 if both spouses qualify) to a qualified charity without counting the distribution as taxable income. What sets the QCD apart from just writing a check or donating stock is that it also counts toward satisfying your required minimum distribution. QCDs also directly reduce your taxable income, even if your total deductions don’t exceed the standard deduction.

Benefits of QCDs

1. Tax Efficiency: Since the QCD is excluded from your taxable income, it helps reduce your overall tax liability, unlike regular IRA withdrawals, which are taxed as ordinary income.

2. Satisfy RMD Requirements: If you're 73 or older and subject to Required Minimum Distributions (RMDs), a QCD can count towards your RMD for the year, lowering your taxable RMD amount. QCDs done early in a retirement plan can also reduce the impact of future RMDs, one of the three major tax landmines in retirement.

3. Itemized Deduction Alternative: For those who don't itemize deductions, using a QCD is superior to writing a check or giving securities, as it allows a direct reduction of taxable income without needing to claim the deduction. The expansion of the standard deduction that accompanied the Tax Cuts & Jobs Act in 2017 means that more and more folks claim the standard deduction.

How to Implement a QCD

1. Contact Your IRA Custodian: Reach out to your IRA provider to initiate the QCD. They will guide you through the process of transferring the funds directly to the charity.

2. Choose a Qualified Charity: Make sure the organization you want to support qualifies under IRS guidelines for charitable donations. Ensure the funds go directly from your IRA to a qualified charity. If you receive the distribution first, it will be taxable. You cannot use a QCD to contribute to a donor-advised fund; it must go directly to a 501(c)(3) charitable organization.

3. Maintain Records: Keep documentation of the transfer and ensure the charity provides a receipt for tax purposes.

By using a QCD, retirees can combine their philanthropic goals with tax savings, making it a win-win strategy for both financial health and charitable giving.