What Can a Qualified Charitable Distribution (QCD) Do for You?


December 12, 2023
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If you’re wondering whether taking a qualified charitable distribution (QCD) is a wise financial move for you, then you’re in the right place.

Check out the following guide to frequently asked questions about qualified charitable distributions, including what they are, how they work, what they can do for you, as well as some advantages and disadvantages of taking qualified charitable distributions. Keep reading to learn more.

What is a qualified charitable distribution?

A qualified charitable distribution (QCD) is a distribution from your individual retirement account (IRA) to an IRS-approved charity.

Who can take a qualified charitable distribution?

Individuals age 70½ or older who own an individual retirement account (IRA) can take a qualified charitable distribution.

How does a qualified charitable distribution work?

Basically, a QCD is a tax-free donation you make from your IRA to a qualified charity.

Qualified charitable distributions can be made from either traditional or Roth IRAs, as well as Active Simplified Employee Pension Plan (SEP) IRAs and Savings Incentive Match for Employees (SIMPLE) IRAs as long as no contributions have been added to these plans during the tax year when the distribution is taken. You cannot take QCDs from 401(k) plans.

It is important to note that not every charity is IRS-approved to receive funds from a qualified charitable distribution, so you will want to check with a qualified tax professional before you make a distribution to a charity of your choice.

The IRS dictates that only 501(c)(3) organizations are eligible to receive funds from a QCD. Private foundations, for example, are not eligible.

What can a qualified charitable distribution do to reduce my federal tax bill?

From a tax standpoint, a qualified charitable distribution can benefit you in two ways:

First, a QCD helps you lower your taxable income.

Even though a QCD is a withdrawal from your IRA, it does not count as taxable income as other withdrawals do. You can deduct a QCD from your gross income and potentially land in a lower tax bracket as a result. You also do not need to itemize QCDs on your tax return, meaning you can still take the standard deduction, which for 2023 is $13,850 for single taxpayers and $27,700 for married couples filing jointly.

Second, a QCD helps you reduce required minimum distributions (RMDs).

Required minimum distribution (RMD) is the minimum amount you must withdraw from your IRA (except Roth IRAs) once you reach the age of 73, as stated by the SECURE 2.0 Act of 2022. Unfortunately, RMDs can increase your taxable income and could move you into a higher tax bracket. QCDs, though, can fulfill required minimum distributions without increasing your taxable income.

Here are a couple of things to note about QCDs:

  • The maximum annual QCD is $100,000.
  • QCDs are not subject to withholding on federal income taxes, but state tax laws differ.
  • Since you cannot take QCDs from a 401(k) plan, they will not count toward your required minimum distributions (RMD) for that plan.

Advantages and disadvantages of qualified charitable distributions

There are pros and cons to qualified charitable distributions, and we’ll take a look at a few of them here.

Pros:

  • ✅ QCDs can be used to reduce your taxable income.
  • ✅ QCDs can be used to fulfill required minimum distributions without increasing your taxable income.
  • ✅ You do not have to itemize deductions on your tax return in order to take a QCD.

Cons:

  • ⛔️ QCDs can only go to eligible charities.
  • ⛔️ You cannot directly withdraw QCDs yourself; they must be transferred from your IRA, through your trustee, to the charity.
  • ⛔️ You cannot take QCDs in excess of $100,000 annually.

Ultimately, a qualified charitable distribution is an effective strategy to reduce your tax burden if you are age 70½ or older.

Reach out to the tax experts at Honest Buck to see whether taking QCDs could be beneficial to you.

Contact us today.


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