With year-end approaching, now is a great time to plan your IRA distribution and charitable giving ... [+]
If you own a Traditional IRA and you’re over age 70½, you are required to start taking distributions from the IRA each year. These required minimum distributions (or RMDs) must be taken annually even if you don’t need the funds to meet your everyday living expenses in retirement.
Having to take RMDs can negatively impact your finances because the withdrawals are taxable at ordinary income tax rates. However, there’s a strategy that can lessen the impact of RMDs while also allowing you to make charitable contributions in a tax-efficient way.
QCDs and RMDs
This strategy is known as a Qualified Charitable Distribution (QCD). With a QCD, you can make charitable donations using money in your Traditional IRA. Since QCDs aren’t considered to be taxable income, you don’t have to pay income tax on the distributions.
In addition to helping ease the tax bite of RMDs, QCDs may also offer other tax advantages. For example, making QCDs does not impact your adjusted gross income (AGI). Phase-outs for such tax items as Roth IRA contribution eligibility, itemized deductions and exemptions, Medicare premiums, the net investment income tax and some tax credits are affected by AGI, so QCDs can be beneficial here.
Also, making charitable donations by using a QCD may enable you to bypass the rule that limits tax-deductible charitable gifts to 60% of your AGI. In addition, QCDs are excluded from taxable income, which means that federal capital gains taxes are not assessed on the distributions.
No Itemizing Required
Since tax reform raised the standard deduction — which is $12,200 for single filers and $24,400 for married couples filing jointly in 2019 — fewer taxpayers are itemizing deductions when filing their returns. As a result, these taxpayers cannot realize a tax benefit from their charitable donations.
QCDs enable these taxpayers to still benefit from making charitable donations. The distributions are excluded from taxable income, which results in a lower AGI and lower tax bill.
The QCD Details
Using a QCD, you can transfer up to $100,000 annually to one or more qualified charitable organizations. These include most religious, scientific, educational and literary organizations such as churches, museums, hospitals and research organizations.
Important note: QCDs must be made directly from the IRA to the charitable organization. So if you make the donation by check, make sure the IRA custodian makes the check payable to the charity, not to you, and sends the check directly to them. Also, QCDs can only be made from traditional, rollover and inherited IRAs, not from SIMPLE or SEP IRAs.
You can initiate a QCD by submitting a form to the IRA custodian requesting that a check be made payable to the charity and sent directly to them. When filing your tax return, you will report the full amount of the QCD on Form 1040. However, you’ll enter zero on the line reporting the taxable amount of the distribution.
Start Planning Now
With year-end approaching, now is a great time to plan your IRA distribution and charitable giving strategies for 2019. As you do, think about whether using a QCD might be a smart strategy for you.
STRATA Trust is a self-directed IRA custodian specializing in holding alternative assets in IRAs. Our team can answer any questions you may have about Qualified Charitable Distributions.
