How does a QCD work (Qualified Charitable Distribution)​?

QCD’s provide a great strategy to limit taxes on retirement account RMD’s (Required Minimum Distributions).

RMD’s can create an unwanted tax burden. Tax law requires you to distribute a certain amount of funds from retirement accounts like 401k’s and IRA’s in the form of RMD’s. If you don’t necessarily need these funds, or are in a high-income year, this can be a bummer. There are some strategies to help with this, and a big one is utilizing QCD’s.
 
QCD’s are a direct transfer of funds from your IRA into a qualified charity. And while QCD’s cannot be made from employer-sponsored plans like 401k’s and 403b’s, you may be able to rollover funds from your employer plans into an IRA, then make the QCD from the IRA.
 
You must be 70.5 or older at the time of distribution and you can distribute up to $100,000 per year toward a QCD, in order to pacify RMD requirements.
 
QCD amounts are excluded from your taxable income, which is huge, as keeping your income down has several potential benefits. For one, it could help avoid you being pushed into a higher tax bracket and may help your eligibility for other tax credits and deductions. Having the lower taxable income could also reduce the amount of your Social Security benefits that are subject to taxes, as well as help you avoid the Income-Related Monthly Adjustment Amount (IRMAA) on Medicare premiums.
 
With the standard deduction increases that were implemented in 2018, more filers are no longer itemizing, so charitable contributions may not be providing a benefit. So rather than distribute retirement accounts as taxable income and then make a charitable contribution that isn’t effectively deducted for non-itemizers, a QCD could provide a deduction benefit by not adding to taxable income in the first place.

Before implementing a QCD, be sure to check with your advisor on additional qualification requirements.