Qualified Charitable Distributions

Provided by Benjamin F. Edwards & Co. and David W. Davies '71, Managing Director -- Investments of Davies Investment Group

If you've made contributions to a traditional IRA, you need to be aware that in the year you reach age 70 1/2 you are obliged to start taking what are known as required minimum distributions (RMDs). RMDs are designed to help the federal government collect taxes on the money that was not taxed when it was first deposited in the IRA and remained untaxed as it grew. The amount you withdraw is considered income for the tax year in which it's withdrawn.

What you may not have heard of are Qualified Charitable Distributions (QCDs) -- tax-free distributions that are made directly from an IRA to a charitable institution for people who are older than age 70 1/2. QCDs allow you to direct up to $100,000 each year to a qualified charity. This distribution directly to the charity is not included in your taxable income on your federal tax return. Congress first authorized QCDs in 2006 on a temporary basis, but it became a permanent part of the tax code in 2015. 

The case for a Qualifed Charitable Distribution

You might consider making a Qualified Charitable Distribution if you:

• don't need all the income from RMDs
• make charitable gifts, but don't itemize deductions (usually, charitable donations only benefit taxpayers who itemize)
• want to avoid being taxed on your RMDs

Be mindful of these limitations

Some other considerations to think about as you consider this strategy include the fact that:

• you must be at least age 70 1/2 when the gift is transferred
• not all charities are eligible and the gifts must be outright, not part of an annuity or charitable remainder trust
• transfers must come from the IRAs directly to the charity
• if you have assets in a 401(k) or 403(b), or other employer-sponsored plan that requires minimum distributions, for example a SEP IRA or SIMPLE IRA, QCDs do not apply to those distributions, however plan assets that are rolled into an IRA would become eligible
• Roth IRAs can also make QCDs, but because Roth contributions may already be income tax-free to you during retirement (if you are older than 59 1/2 and have held the Roth IRA for 5 years), there is no additional tax benefit you receive from making the direct gift to the charity from a Roth IRA.

If you're still uncertain about RMDs and QCDs -- or gifting strategies in general -- but you think they may be applicable to your situation, talk to your financial advisor, as well as your accountant or tax attorney.