A Qualified Charitable Distribution (QCD) provides an opportunity to contribute to your favorite charity while meeting your commitment to your Required Minimum Distribution (RMD), with less of a cost.
In this blog, you’ll learn:
- What Are Qualified Charitable Distributions?
- How to Contrast a Standard Donation from a QCD Donation
- QCD vs Gifting Appreciated Securities
- Is a Qualified Charitable Distribution Right for You?
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What Are Qualified Charitable Distributions?
A Qualified Charitable Distribution (QCD) provides the opportunity to contribute to your favorite charity, while accomplishing other benefits at the same time. Let’s see if a QCD is right for you.
A QCD is a withdrawal from your pretax retirement account (such as a Traditional IRA), that goes directly from your IRA to your favorite charity.
The features of a QCD include:
- You must be 70 1/2 or older
- The money comes out of your pretax retirement account, such as a Traditional IRA
- It must go to an IRS recognized 501(c)3 charity
- The distribution counts as part of your required minimum distribution (RMD)
- You do not have to pay state or federal income tax on this distribution
Fidelity is the custodian of the accounts for our clients and will send the money directly from your account to the charity of your choice.
How to Contrast a Standard Donation from a QCD Donation
A standard donation to your favorite charities is always welcome and generous, but a QCD based donation will help you to meet an RMD commitment and lower the cost of the donation to you.
Let’s give a couple of examples to contrast the difference:
Standard Non-QCD Donation
Chris is over 72 and takes $5,000 out of a pretax, traditional IRA and sends it to their checking account. Then, Chris makes a $5,000 charitable contribution by sending the money from their checking account to their favorite 501(c)3 charity.
- The $5,000 counts towards their RMD
- If they are in the 24% federal tax bracket, then Chris owes federal taxes of $1,200
- The total cost of the charitable donation is $6,200
QCD Donation
Tracy is over 72 and sends $5,000 directly from a pretax, traditional IRA to their favorite 501(c)3 charity.
- The $5,000 counts towards their RMD
- The $5,000 is excluded from their taxable income, so their federal and state tax bill on the distribution is $0
- The total cost of the charitable donation is $5,000
QCD vs Gifting Appreciated Securities
There are some things to consider when deciding whether you should do a QCD or possibly explore gifting appreciated securities directly, such as through a Donor Advised Fund.
Reference Additional Resources on Charitable Giving:
- Donor Advised Fund – Efficient Charitable Giving
- Reducing Taxes Before and During Retirement Webinar Replay and Handouts
Is a Qualified Charitable Distribution Right for You?
In summary, if you already have an interest in donating to a 501(c)3 charity, and you are 70 1/2 or older, then making a QCD from your pretax, traditional IRA may be something to consider.
Talk with your Wealth Manger at Financial Journey Partners if you are interested in making a Qualified Charitable Distribution. If new to our firm, you are welcome to schedule time for a second opinion or a complimentary initial consultation.
Financial Journey Partners is Here to Help You
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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Financial Journey Partners, nor any of its members, are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.