If this describes you, and own tax-deferred retirement accounts, then there’s a tax-savings opportunity to explore for conducting your charitable giving. This opportunity is called the Qualified Charitable Distribution or QCD.
How a Qualified Charitable Distribution or QCD works
Essentially taxpayers 70 ½ or older are allowed to transfer assets from their IRA accounts directly to charity without paying taxes on the distribution. Normally, distributions from tax deferred accounts are subject to income taxes at both the federal, state and sometimes local level.
What makes this option for charitable contributions even more attractive is that it can account for a portion of your Required Minimum Distribution (RMD) if it’s made before you satisfy your RMD for the calendar year. If you don’t rely on your full RMD for income, the QCD provides some extra tax relief because the distribution isn’t treated as taxable income. Bottom line: taxes paid on your RMD are minimized, while making an impact on causes that are important to you.
You can still use a QCD even if you take a standard deduction
There’s good news for those who take the standard deduction. The QCD allows you to exclude the donation from taxable income even if you take the standard deduction. This means those who don’t typically itemize can realize some tax benefits for their charitable contributions.
The annual QCD limit is $100,000 per person
Each taxpayer can donate up to $100,000 to a qualified charity directly from a traditional or rollover IRA even if the RMD is less than $100,000. If you are married, each spouse can distribute up to $100,000 from their respective accounts.
Funds must be directly sent from your IRA to a qualified charity
The custodian or trustee of your IRA must facilitate your distribution from an IRA to qualified 501(c)(3) public charities. If you want to make a distribution using funds from a 401(k), 403(b), SEP, or SIMPLE IRA, you will need to facilitate a direct rollover of these funds to the IRA so that you can then make the QCD from the IRA.
It’s important to note that the IRS does not allow qualified charitable distributions to donor-advised funds, private foundations, or supporting organizations.
Next steps
If you’re 70 ½ or older, are charitably inclined, and have tax deferred retirement accounts, we encourage you to speak with your MPPL Financial Advisor to discuss the appropriateness of this strategy for your situation.
During our discussion, we will discuss your overall charitable giving plans, evaluate the tax benefits of using a QCD, as well as explore the most tax effective ways for you to make an impact on the causes that matter the most to you. If you decide to move forward with making charitable gifts from the retirement accounts that we manage, we will also work with you to facilitate the transaction.
We look forward to discussing this often-overlooked tax-savings opportunity for those eligible individuals seeking to make an impact in the world.
MPPL Financial has offices in Wausau, WI, Duluth and Grand Rapids, MN, and Crystal Lake, IL. While we’re based in the Midwest, we work with clients across the entire U.S.
No client or potential client should assume that any information presented or made available on or through this article should be construed as personalized financial planning or investment advice. Personalized financial planning and investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Please contact the firm for further information. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Additional information about Midwest Professional Planners is available in its current disclosure documents, Form ADV, Form ADV Part 2A Brochure, and Client Relationship Summary report which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using SEC # 801-72649.