Words For the Week # 10
Qualified Charitable Distribution (QCD)
A Qualified Charitable Distribution is contributing to a 501(C)3 Charitable organization from ones IRA, or other IRA qualified Retirement account .
- Rollover IRAs
- Inherited IRAs
- Simplified Employee Pension (SEP) IRAs (inactive plans only)
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs (inactive plans only)
While income tax is normally due on each traditional IRA distribution, the account owner does not need to pay taxes on the amount transferred to charity.
If you file a joint tax return, you and your spouse can make a charitable contribution of up to $100,000 each, meaning couples can exclude up to $200,000 of their retirement savings from income tax if they donate it to charity. If you donate more than the maximum allowable amount, it is considered income and could be subject to income tax. Qualified charitable contributions must be made by Dec. 31 each year in order to exclude that amount from taxable income.
An IRA charitable contribution satisfies the annual minimum distribution requirement for your IRA. You can donate part of your required distribution to charity and withdraw the rest of it as retirement income as long as you meet the minimum distribution requirement by the end of the calendar year. A $100,000 charitable contribution from your IRA could save you thousands of dollars in taxes, depending on your tax rate.
Funds must be transferred directly from the IRA to an eligible charity by the IRA trustee in order to qualify for the tax break. If you withdraw the money from your IRA and later donate it, it won't qualify as a tax-free qualified charitable distribution. A charity must be a 501(c)(3) organization to receive tax-free IRA charitable contributions. Charities that do not qualify include private foundations and donor-advised funds. You can distribute your required minimum distribution to multiple charities in the same year.
Most churches, nonprofit charities, educational organizations, nonprofit hospitals, and medical research organizations are qualified 501(C)3 organizations. The charity will not owe taxes on the donation. Taxpayers whose annual income affects their Medicare premiums may also find that this provision helps control the premium cost.
QCDs are a good choice for individuals who otherwise could not deduct all or part of their charitable donations because of the IRS rule prohibiting a deduction for amounts that exceed 60% of a taxpayer's AGI.
Another way to donate IRA assets is through an estate after the donor's death by naming the charity as a designated beneficiary of the IRA. Once this is done, the charity receives whatever percentage of the account's assets the owner states on the beneficiary form when the estate is settled.
There are some added benefits to naming a charity (or charities) as a beneficiary and donating funds from your IRA after your death rather than doing so while you're still alive. Not only can you choose to allocate specific percentages to your heirs and charities, but you can also use the funds to provide financial support to the causes that are near and dear to you. If you choose to roll the entire balance of your account over to a cause, that charity will get the full benefit.
Important Note: You can use this strategy with IRA type distributions, but not with 401(k) distributions. So if you want to donate your 401(k) funds to charity, you’ll either have to pay tax on it first or roll it over into an IRA.
Another method to receive a charitable donation benefit:
Donating from your IRA as a qualified charitable distribution means you won't pay any taxes on the amount donated the same way you would if you took a required minimum distribution as income. But you won't be able to claim the amount as a deduction on your annual tax return.
However making a contribution from stocks may end up benefiting you more in the long run, especially if you held the stock for more than a year and its value appreciates by the time it is donated. This allows you to deduct the stock's full fair market value without having to realize the capital gain. Detail about this process will be in a future Blog.
Much of the above information was selected from Investopedia definitions of Financial Terms, and other sources. The information is believed to be accurate, but cannot be considered to be all inclusive and complete. It is a synopsis of a current item or term of interest. The opinions expressed are mine and not to be considered an investment recommendation or solicitation of any specific product or program.
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