February 14, 2023 by Ed Barno
What is a Qualified Charitable Distribution (a “QCD”) and why might it be advantageous for those who can do them?
A QCD is a distribution from your IRA directly to a qualified charity (versus taking a distribution from your IRA and then making a charitable contribution). A QCD counts towards your IRA required minimum distribution, if applicable.
The general rules governing QCDs are as follows:
- The owner of the IRA must be at least 70 ½ at the time the QCD is made.
- They can be taken from an IRA or a SEP or a Simple IRA, if those are inactive retirement accounts (no longer receiving contributions).
- You may do as many individual QCDs as you would like. However, an individual is limited to a total of $100,000 per year.
- The QCDs must be made to a Qualified Charity. They cannot be made to an individual’s Donor Advised Fund or to a Private Foundation.
What are the potential benefits of making QCDs?
- As the distributions are made directly from your IRA, they are not reported as taxable income as a regular distribution would. Consequently, the taxable income and the adjusted gross income you report is lower by the amount of the QCD. Because of lower taxable income and adjusted or modified gross income, the following benefits may be realized.
- For some, the amount of Social Security benefits subject to income tax may be less.
- For those who would otherwise use the standard deduction, you can still use the standard deduction and also get the full deduction benefit of the QCD.
- You may be in a lower income bracket for purposes of calculating your Medicare Part’s B and D premium.
- You may have less income subject to the 3.8% Net Investment Income Tax.
For many who make charitable contributions and who qualify to make QCDs, there will be a financial benefit to doing so versus simply taking a distribution and then contributing to your charity. As is usually the case, there may be further rules governing your situation. If you qualify to make QCDs and are inclined to make charitable contributions, please contact us so we can work with you to determine what is most advantageous to you.