If you are subject to an RMD, looking for ways to reduce your tax burden, and charitably inclined, then the Qualified Charitable Distribution (QCD) could be just the tool for you. The QCD is one of the greatest tools available that no one seems to know about.
In a QCD, you direct your financial institution to make a distribution from your pre-tax retirement account directly to a charity of your choice. The financial institution will usually have a special form for this purpose, as they need to collect information about the charity, such as the name, address, and tax id. You must be subject to an RMD to use the QCD.
That’s it, and at its core, it is that simple. But like anything else, the devil is in the details.
Here are the top 5 things to know about the QCD:
1. The check from your retirement account will be made out to the Charity. However, as a fraud prevention step and a way to ensure the donor gets the credit they deserve, the check will usually go to the address of record for the account holder. That means you will need to keep an eye out for the check and make sure it eventually gets to the charity.
You should still receive a receipt or other documentation from the charity. Just make sure that you don’t try and claim the QCD as a tax deduction. That would be double-dipping. Instead, you will use that receipt in the next step.
2. You will still get a 1099-R for the full amount of the QCD. That is ok, as long as you tell your tax professional about the QCD. Your tax return will need to be adjusted so that you don’t pay the taxes on the amount of the QCD. You can use the receipt you receive from the charity for this purpose.
3. The QCD limit is the lesser of $100,000 or your RMD amount. This number has not budged since 2006, when Congress first passed legislation implementing the QCD. If your RMD for a given year is greater than $100,000, then the balance of the RMD must be taken as a taxable distribution. If your withdrawal is more than your RMD, don’t worry, the QCD will be tax-free up to the amount of the RMD, and anything above that will be taxed at your regular tax rate.
4. The QCD amplifies your giving. How does that work, you ask? Let’s assume for the moment that you were planning on giving $10,000 to charity “A.” By way of example, let’s assume you pay a combined effective rate of 20% in Federal and State Income taxes. To net $10,000 from a distribution from your pre-tax retirement account, you would need to withdraw a gross amount of $12,500 (the tax hit would be 20% x $10,000, or $2,500).
By using a QCD, the charity receives every dollar of the distribution, so you only have to withdraw $10,000 for the charity to receive $10,000. You can therefore amplify your contribution to the charity by giving the full $12,500 AND reduce your tax burden in the process.
5. You can’t fund a DAF with a QCD. While the Donor Advised Fund (DAF) is a great tool for the charitably inclined, the rules for the QCD specifically prohibit directly to your QCD. You must give the QCD directly to your preferred charity.
That does present one small-ish problem. If you were thinking about giving numerous small amounts, the QCD can be a bit cumbersome. This would be much better suited to the DAF. Each charity may require a form by itself. Oen year we had a client use the QCD to give $100 to about twenty different charities. It was a lot of paperwork!
Sound interesting? Want to know more? Let’s talk!