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How QCDs Could Be Just The Strategy You've Been Looking For In Retirement

How QCDs Could Be Just The Strategy You've Been Looking For In Retirement

October 01, 2018

As we look to implement specific financial planning techniques with our clients, one strategy we often look to is something called a qualified charitable distribution, or QCD. First we will talk a bit about what a QCD is, then we’ll talk about ways it might benefit you.

QCDs came out of the Consolidated Appropriations Act of 2016 which allow qualified charitable distributions from individual retirement accounts. The QCD provision permits taxpayers who are at least age 70½ to make tax-free distributions directly from a Traditional IRA or a Roth IRA to a qualified charity. The donation is limited to $100,000 per person (married taxpayers filing jointly may exclude up to $100,000 donated from each spouse’s own IRA), and it may be used to partially or fully satisfy the taxpayer’s required minimum distribution for the current tax year.

English, please?

A QCD is simply a withdraw from your Traditional or Roth IRA for the purpose of giving it to a charity. The catch is, you must be age 70 and a half — because reaching 70 years old isn’t good enough! If you do this, the amount you withdraw and donate to charity will not be taxed.

Who benefits from a QCD?

It can be a win-win for both you and the non-profit. People who implement this strategy, are often doing so to satisfy the required minimum distribution (RMD) from their retirement accounts. You see, when someone hits age 70 and a half, the IRS starts forcing individuals to take a minimum amount from their IRAs. But sometimes, the individuals aren’t ready to do that yet as a required minimum distribution can place individuals in a higher tax bracket.

To avoid this, a QCD might be beneficial. Each dollar removed from an IRA for the purpose of donating to a qualified charity will count towards satisfying the required minimum distribution, and will reduce their income for tax purposes.

So who benefits? You do! Your charity benefits for obvious reasons as well.

How does Trump’s recent changes to the tax code play into this?

Interestingly, the Tax Cuts and Jobs Act of 2017 might actually make QCDs a bit more popular. It used to be people would get tax benefits from charitable giving as an itemized deduction. Now, the standard deduction has almost doubled for most filers so we’ll see far less people itemizing. This means the primary tax benefit of donating to charity for a much higher percentage of people is through a QCD.

Do QCDs offer any other benefits?

As a matter of fact, yes! We’re glad you asked. QCDs reduce your income in the eyes of the IRS and reducing your income can provide some other benefits in retirement as well. You might qualify for tax credits you wouldn’t have, you might avoid the medicare premium surtax or reduce the amount of taxes you’ll pay on social security.

Are there any restrictions?

There are. You can only make QCDs up to $100,000 per calendar year. This can be in the form of one distribution, or multiple, as long as the total doesn’t exceed $100,000.

Also, QCDs are limited to Traditional or Roth IRAs. Other retirement accounts do not qualify.

Finally, QCDs must be made to a qualified charity. A charity that would likely qualify is a church or 501(c)3.

To summarize…

QCDs are part of the tax code that we as financial planners and advisors often use as a strategy to help minimize the tax liability for our clients, while also helping them meet their philanthropy desires. The strategy is not advantageous for everyone, and there are some restrictions in place. Give us a call and let us know you read this article. We can let you know if this strategy might benefit you.