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Qualified Charitable Distribution (QCD)

Required Minimum Distributions (RMDs) are mandatory withdrawals that must be taken from certain retirement accounts after you reach a certain minimum age. Retirement accounts subject to RMDs include traditional IRAs, SEP IRAs, 401(k) plans, 403(b) plans, and many others. Most Roth IRAs do not require withdrawals until after the death of the original owner but beneficiaries who inherit a Roth IRA may be subject to the RMD rules. The age for starting RMDs has been raised to 73 due to changes contained in the “Secure 2.0 Act” passed by Congress in December 2019. If you were born in 1960 or later the RMD starting age will be 75 years old. This adjustment aims to accommodate longer lifespans and delayed retirements. The RMD amount is calculated based on factors such as the individual’s age, retirement account balance, and life expectancy using IRS tables. Failing to withdraw the RMD can result in significant tax penalties. The Secure 2.0 Act drops the excise tax rate on RMD amounts not withdrawn from 50% to 25% (which could be reduced to 10% if the RMD is timely corrected within two years.) Any RMD amounts taken from your retirement accounts for your personal use may be taxable to you.

A Qualified Charitable Distribution (QCD) is a tax strategy that allows individuals aged 70½ or older to directly transfer funds directly from their IRA to a qualified charity. The transferred amount counts toward satisfying the RMD requirement while excluding the QCD distribution from taxable income. In 2023 up to $100,000 a year per taxpayer may be transferred tax-free from your IRA directly to charitable organizations without tax on the distribution. This exclusion from taxation applies whether you itemize on your tax return or take the standard deduction. Since QCDs are excluded from income, they also leave you with a lower Adjusted Gross Income (AGI). [Note: If you do itemize, be aware that since your QCDs reduce your AGI you can’t double dip by claiming them as itemized deductions as well.] Starting in 2024 the QCD limit will be adjusted annually for inflation and will be $105,000 in 2024.

A Qualified Charitable Distribution from your IRA directly to a qualified charity has several advantages:
-Tax Savings: By donating directly from your IRA to charity, the distributed amount is excluded from your taxable income. This can result in lower taxes compared to taking the RMD as taxable income and then making a charitable donation.
-Avoiding the Income Bump: RMDs can increase your taxable income, potentially pushing you into a higher tax bracket and triggering other tax implications, such as higher Medicare premiums. QCDs help mitigate this issue by reducing your adjusted gross income.
-Supporting Causes You Care About: QCDs allow you to support charitable organizations and causes that are meaningful to you while fulfilling your RMD obligations.

Implementing a Qualified Charitable Distribution involves several steps:
-Check Eligibility: Ensure you meet the age requirement of 70½ or older. If eligible, confirm that the charity you wish to support qualifies to receive QCDs. [Note: The EveryCat Health foundation (EIN 23-7138699) is fully qualified to receive your QCD donations.]
-Determine the Amount: Decide the amount you want to donate as a QCD, keeping in mind that it can’t exceed your annual RMD.
-Contact Your IRA Administrator: Notify your IRA custodian or administrator of your intent to make a QCD. Provide instructions on the amount and recipient charity.
-Direct Transfer to Charity: Instruct your IRA custodian to transfer the specified amount directly to the qualified charity. This transfer should be made payable to the charity, not to you.
-Keep Records: Maintain documentation of the QCD transaction for tax purposes, including records of the donation and any correspondence with your IRA administrator and the charity.
By following these steps, you can seamlessly execute a QCD and support charitable causes while fulfilling your RMD obligations.

Understanding Required Minimum Distributions (RMDs) and the strategy of Qualified Charitable Distributions (QCDs) is a useful tool for effective retirement planning. RMDs ensure that retirees gradually draw down their retirement savings, while QCDs offer a tax-efficient way to meet RMD obligations while supporting charitable causes. By staying informed about retirement and tax laws and implementing QCDs when appropriate, individuals can maximize their retirement income and make a positive impact through charitable giving. For more information, please see IRS Publication 590-B or consult your tax advisor. ~GJE

Updated February 15, 2024 

 

George J. Eigenhauser Jr. is an attorney at law, licensed in the state of California since 1979. He has served on EveryCat Health Foundation (previously the Winn Feline Foundation) Board of Directors and as CFA liaison to EveryCat for more than 20 years.
His expertise in the area of wills, trusts and estate planning allows him to assist donors with planned giving decisions.