Those owning IRAs can use Qualified Charitable Distributions (QCD) through their IRA.
Doing this is smart tax planning. IRA owners who are 70 ½ or older can transfer up to $105,000 per person in 2024 from their IRAs directly to a IRS-qualified 503(c)(3) charity such as your church, Red Cross, Food Bank etc. These so-called QCDs can count as all or part of your required minimum distribution, but they are not taxable, and they are not added to your adjusted gross income, which can help you mitigate surcharges on your 2026 monthly Medicare premiums which is based on adjusted gross income before deductions. Whereas charitable deductions listed on schedule are subtractions after your adjustable income.
Here are some other important QCD rules you should be aware of:
*Only transfers from your IRA directly to the charity qualify as QCDs. Most IRA custodians will require you to fill out a form requesting the charitable payout. The custodian will then either mail the money to the charity or make a check payable to the charity for you to mail. Be sure to receive confirmation from the charity and that the check is cash by December 31.
*You must be at least 70 ½ years old on the date the QCD is made. For example, if you turn 70 ½ on December 1, you must wait until that day or later to make the charitable transfer.
*The IRA owner will allow the IRA owner a one-time (not annually) QCD designation up to $53,000 through a charitable remainder unit trust, charitable remainder annuity trust, or a charitable gift annuity. Significantly, a QCD to a donor advisor fund is not allowed. Be sure to check with your financial advisor and lawyer for details of these trusts.
– QCD’s cannot be done through a 401(k) K or other workplace retirement plan.
– If you are working and making a deductible IRA, Simple IRA, or SEP IRA contribution after 70 ½ these payments reduce your allowable tax-free QCD amount until they are used up. Typically, this is irrelevant. For example, a typical donation for an IRA SEP account of up to $50,000 still leaves plenty of QCD to donate as the maximum this year is $105,000.
*You cannot deduct the QCD as a charitable contribution on Schedule A. Again, this is not really an issue because some 80 to 90% of taxpayers do not itemize but take the standard deduction which is much larger than their itemized deductions would be.
PS –You can still use this tax-saving technique if you have not taken your RMD yet this year. However, you may want to talk to your tax advisor about using it either now or early next year.
IMPORTANT DISCLOSURES:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
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