MAKE A HUGE DIFFERENCE WITH QCDs!
Giving to Rocsana’s Hope with Qualified Charitable Distributions (QCD) can be a benefit in many ways. Not only does it help our girls have hope for their future and makes you feel great about helping, it can have a positive impact on your taxes. Taking money out of an individual retirement account (IRA) to give to charity is known as a qualified charitable distribution (QCD), and it may help you with your taxes. Make sure you know everything about QCDs before making the decision to take this path, and talk to a financial advisor if you need help.
What Are QCDs?
A QCD is the withdrawal of funds from an IRA with the intention of donating them directly to a qualified charity. There are tax benefits that go along with this strategy. You can use QCDs when you’re taking required minimum distributions (RMDs) in retirement.
You may qualify for a QCD if you have a traditional IRA, an inactive SIMPLE IRA (meaning you and your employer are no longer contributing to the account during the same tax year that you’re making a charitable contribution), an inactive SEP-IRA or an inherited IRA. However, certain rules apply.
Using a Roth IRAs is usually a bad idea (and it’s usually prohibited). Why? For one thing, a QCD must be a distribution that would normally be subject to taxation. Roth IRA distributions are usually tax-free.
Rules for Making QCDs
You can’t qualify for QCDs unless you can meet certain requirements.
- You must be at least 70 1/2 years old.
- Your QCD cannot exceed $100,000 in a calendar year.
- You donation must go directly to the charity.
- You must not receive anything (other than an intangible religious benefit) from the charity as quid pro quo for your contribution
- The charity must provide you an acknowledgement stating the amount of the charitable distribution and that no goods, services, or benefits of any kind were or will be provided to you in consideration for the distribution from the IRA
- Also, the contribution cannot go to a donor-advised fund, supporting organization or private foundation
- You cannot make the charitable IRA distribution from Simplified Employee Plans and Savings Incentive Match Plans for Employees if an employer contribution is made for that year.
Using QCDs to Satisfy Required Minimum Distributions
Forgot the rules for RMDs? Here’s a quick refresher. Retirees with certain accounts must begin pulling out their savings when they reach a certain age (i.e. 70 1/2). Withdrawals are taxed as ordinary income. If you don’t take your RMDs, you’ll get hit with a 50% penalty.
If you want a QCD to satisfy your required minimum distribution, you’ll need to transfer funds from your IRA by the end of the year. Any amount above what you’re required to withdraw can’t count as a RMD for the following year. For example, let’s say your annual RMD is $20,000 and you make a $25,000 QCD for 2019. The extra $5,000 cannot go toward your RMD for 2020.
How QCDs Affect Your Tax Bill
With the exception of Roth IRAs, most IRAs are subject to required minimum distributions. But the money you give to charity via a QCD isn’t considered part of your taxable income. In other words, you can lower your federal income tax bill by making a qualified charitable distribution. To find out how a QCD might affect your state income tax bill, you’ll need to contact a tax accountant.
If you make a QCD, it’s best to hold onto the receipt from the charity you donated to, just in case you need that information for tax purposes. Your IRA custodian will report your QCD to the IRS (using Form 1099-R) as either a normal distribution (if it’s from an IRA you didn’t inherit) or a death distribution (if it’s from an inherited IRA).
By reducing your taxable income, QCDs can also reduce the amount of Social Security taxes you pay. They may also help you avoid the 3.80% Medicare surtax on investment income. The surtax applies to individuals with a modified adjusted gross income that exceeds a certain threshold. If it looks like you have less income subject to taxation, you may not have to worry about the surtax at all.
Making a qualified charitable distribution from an IRA to Rocsana’s Hope is one way to lower your tax bill. Such a move could be better than making a tax-deductible contribution since you won’t get credit for a charitable donation if you don’t itemize your deductions.
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The material presented in this web site is not offered as legal or tax advice. You are urged to seek the advice of your tax advisor, attorney, and/or financial planner to make certain a contemplated gift fits well into your overall circumstances and planning.