Aspects of Qualified Charitable Distributions (QCDs)

The new Tax Cuts and Jobs Act could change the way IRA owners take their Required Minimum Distributions (RMDs) once they reach age 70 ½. Although the Qualified Charitable Distribution (QCD) already was a viable option before the tax proposal became law in late 2017, the act does make QCDs a more attractive choice now than before for some people.

Owners of a Traditional IRA that reach age 70 ½ will be required to take RMDs on an annual basis. The RMD amount varies every year and is calculated based on an actuarial table provided by the IRS. Most IRA contributions are tax-deductible in the year that they’re made and RMDs are the government’s way of collecting taxes on tax-deferred growth in each account.  However, there is a way to circumnavigate the income tax liability caused by RMDs by utilizing the QCD rule and simultaneously donating to charity.

The QCD rule essentially gives the IRA owner a chance to forgo paying income taxes for up to $100,000 of distributions in a given tax year. Taxpayers can avoid a tax liability on their RMDs by directly paying their distribution to a qualified 501(c)(3) charitable organization. Not only will the taxpayer satisfy their annual RMD requirement, but by making a QCD, the taxpayer also will avoid the annual RMD associated tax liability. In fact, any QCD treated distribution will not be reported, preventing the taxpayer of potentially moving into a higher tax bracket.

A few important factors must be in place when pursuing the potential benefits of QCDs:

First, a taxpayer must first reach the RMD age of 70 ½. Second, the organization receiving the QCD must be an eligible, public charity which is typically designated as a 501(c)(3). Lastly, the distribution to the qualified charity must also be a direct transfer from the IRA account to the organization.

Please reach out to your Wealth Advisor should you have any questions or want to discuss QCDs further.