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When to Consider Using a Qualified Charitable Distribution (QCD) to Reduce Taxes

Qualified Charitable Distributions (QCDs) are distributions made directly from your Individual Retirement Account (IRA) to a qualified non-profit organization. Making a donation through a QCD at the right time can not only benefit a charity you feel passionate about, but can also help reduce the income tax impact caused when you begin taking Required Minimum Distributions (RMDs) from your retirement account.

Understanding QCDs

In basic terms, a QCD is a tax-free donation made to a qualifying non-profit of your choice. The upper limit of the donation is $100,000 for each individual and the donor must be 70 ½ or older.  In other words, even though the withdrawal from an IRA would ordinarily be taxable income, because the donation is going directly to a charitable organization, the entire amount passes to the charity tax-free.

QCDs as a Tax Benefit

Contrary to what some may believe, if you have reached age 72 (the current age that one must begin taking RMDs from a traditional IRA), a Qualified Charitable Distribution counts toward your yearly Required Minimum Distribution. Therefore, if your RMD is $50,000 for the year and you make a QCD transfer from your IRA during that year, you have both satisfied your RMD and made a $50,000 tax-free transfer to charity.

That said, the QCD tax strategy may not be suitable for everyone with an IRA. We recommend only taking advantage of QCDs to reduce taxes under the following criteria:

  • You are charitably inclined.
  • You have spoken to your financial advisor, accountant, and/or estate planning attorney ahead of time.
  • You have other sources of income or enough savings to sustain yourself and your family other than the RMD.
  • You have reviewed this strategy as part of your overall estate and financial plan.
  • The charity for which you are planning on donating the QCD is an IRS-approved 501(c)(3) organization.

Things to Keep in Mind

Per the SECURE Act, in 2021, IRA holders can make QCDs starting at the age of 70 ½ before they hit the RMD age of 72.

For those between the ages of 70 ½ and 72, contributing to your IRA and a QCD in the same year may not provide you with any tax benefits, as they have to be matched dollar for dollar. The SECURE Act includes an anti-abuse provision that prevents individuals from repurposing their IRA contributions as Qualified Charitable Distributions. Simply put, you must deduct the total amount of your IRA contributions from your allowed QCD amount before withdrawal.

Start Planning Today

Are you ready to make the most out of your retirement while leaving a lasting impact on the world? Meet with a qualified estate planning attorney today and learn more about how you can take the future into your own hands.

If you have questions about QCDs, please contact us at (443) 589-5600. At Sessa & Dorsey, we consider the bigger picture at hand and advise our clients on the best estate planning tools for their specific needs and desires. 

Related blog posts:

Is a Qualified Personal Residence Trust (QPRT) Right for You?
Estate Planning for Owning Real Estate in Multiple States
Understanding the Ins and Outs of Charitable Giving
The Top 5 Benefits of a Trust

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