How Making a Qualified Charitable Distribution from your IRA Can Help You

As most people get older, they feel the need to increase their philanthropic behavior. It can be that they have more money, more time or a desire to give back.  Many people make financial donations to a wide variety of charities for the overall benefit of a better society.  Although these donations provide benefits to the charity, they also can provide benefits to the person giving them.

With the recent passing of the Protecting Americans from Tax Hikes (PATH) Act of 2015 in December, the Qualified Charitable Distribution (QCD) provision finally became a permanent provision in the tax code.  This provides more certainty for your financial planning and the strategy can be employed earlier in your financial plan.  In the past, this provision has been passed at the last minute, late in December, creating uncertainty and making it difficult to use in a financial plan.

 The Qualified Charitable Distribution (QCD) is a provision that allows an individual over 70 ½ to directly transfer funds from an IRA (other than SEP and SIMPLE) directly to a qualified public charity without including the distribution as taxable income.

How does this benefit you?

  • The Qualified Charitable Distribution can qualify for your annual IRA Required Minimum Distribution (RMD.)
  • Reduced taxable income.  Lower Adjusted Gross income can lead to avoidance of reduction in itemized deductions, taxability of Social Security benefits or higher Medicare premiums.
  • You make financial donations to charities but don’t itemize deductions on your tax return, so you are not able to receive the tax benefit of the charitable deduction.
  • You make financial donations to charities over the normal Adjusted Gross Income (AGI) percentage limits (50%/30%/20%) where the amount donated is over the limit and could not be used in the current year carrying over to future years.

It is most beneficial to individuals or families that are charity minded and don’t need the Required Minimum Distribution (RMD) to live on.

There are rules to be aware of;

The individual needs to be over 70 ½ when the distribution is made

  • The limit for distributions is $100,000 per IRA or beneficiary.
  • The distribution must be made directly from your IRA custodian or financial institution where the IRA is located to the charity. 
  • Distributions can only made from IRAs, not a 401(k)or 403 (b)
  •  Cannot be used to fund charitable annuities or charitable remainder trusts
  • The charity must qualify for a charitable income deduction of an individual other than a private foundation, a donor-advised fund or a supporting organization as per Internal Revenue Section 509(a)(3).
  • You would not be able to claim the Qualified Charitable Distribution (QCD) as an itemized deduction.  You already receive the tax benefit by not including the withdrawal/distribution in your taxable income.

To make a Qualified Charitable Distribution (QCD), you would need to request the distribution (check) from the financial institution who holds your IRA to title and submit directly to the named charity. I would recommend verifying with the charity the correct titling and mailing address before submitting distribution request.

For assistance with the Qualified Charitable Distribution (QCD), it is always best to seek the assistance of a qualified professional such as a Certified Financial Planner® Professional.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. 

Investment advisory services offered through PARAGON Wealth Strategies, LLC., a registered investment adviser.  Ed Acker, CFP®, is a Financial Advisor with PARAGON Wealth Strategies, LLC.  Please see his bio here.

UncategorizedEdward Acker