If you are 70½ or older, you have the option to use your individual retirement account (IRA) assets to create a charitable fund that supports your favorite charities. This is accomplished through a qualified charitable distribution (QCD). To make the most of these accounts, it's worth digging into the details of how QCDs work, which charities qualify, and the pros and cons of using them.
What is a qualified charitable distribution?
A qualified charitable distribution is the direct transfer of assets from your IRA, payable to a qualifying charity, that count toward annual
- If you were born in 1950 or earlier: You must make RMDs at age 72.
- If you were born between 1951-1959: You can delay your RMD age to 73.
- If you were born in 1960 or later: Your RMD start age is 75.
You can transfer up to $100,000 per year from your IRA to qualifying charities. The money you donate to charity through a QCD is classified as a direct transfer, which enables the contribution to avoid taxation.
The Secure Act 2.0 now also makes it possible to give a one-time annual gift of up to $50,000:
- Gifts can go to a
charitable remainder unitrust(CRUT), charitable remainder annuity trust(CRAT) or charitable gift annuity(CGA).
- For the gift to count, it must come from your IRA by Dec. 31.
Potential tax benefits of a QCD
QCDs are distributions from an IRA that are not included in your adjusted gross income. This unique feature enables several potential tax benefits, such as:
- Making RMD and reducing tax at the same time. By reducing otherwise taxable IRA distributions, QCDs can reduce your adjusted gross income (AGI) while also satisfying the RMD amounts required by the IRS.
- Avoiding higher tax brackets. Since QCDs reduce taxable income, they can help bring an individual or household into a lower tax bracket, thereby creating more tax savings.
- Avoiding higher Medicare premiums. Making a QCD reduces your modified adjusted gross income for Medicare purposes. In 2023, most people will pay a
$164.90 monthly premiumfor Medicare Part B. However, single tax filers with incomes over $97,000 and joint filers with income above $194,000 pay premiums ranging from $230.80 up to $560.50.
Pros & cons of a QCD
QCDs are not right for every situation, so consider both the potential pros and cons of using QCDs.
Pros of a QCD
- Tax benefits. QCDs can provide tax advantages by lowering your adjusted gross income (AGI). This, in turn, can help offset other taxes—like Social Security.
- Make a charitable impact. Some decisions are about more than finances. Not only can you reap some tax benefits, you'll also make a difference in the world by contributing toward your favorite qualifying charities.
Cons of a QCD
- Age requirement. Only IRA owners ages 70½ and older may make QCDs.
- Limits on contributions. The maximum QCD is $100,000 total per year. In addition, a one-time annual distribution of $50,000 applies to QCDs to charities through charitable gift annuities, charitable remainder unitrusts and charitable remainder annuity trusts. Keep in mind the one-time $50,000 distribution would count towards the $100,000 total for that year. Starting in 2024, the one-time $50,000 limit as well as the $100,000 annual limit will be indexed for inflation.
Other ways to use QCDs
There are other beneficial ways to use QCDs through working with charitable foundations, such as
- Use your QCDs to create a charitable fund (non-advised) and select favorite charities to receive annual grants, either for a term of years or in perpetuity. Your charitable recommendations remain in place for the life of your charitable fund. (Due to federal tax codes on QCDs, you may not add or remove benefiting charities or change the distribution plan).
- Use your QCDs to make a significant charitable gift upon death using life insurance. Your QCDs pay ongoing premium payments to a life insurance contract that names a charitable foundation as owner and beneficiary. Proceeds from this life insurance contract are directed to your charitable fund to support one or more of your favorite charities.
Charities that qualify for a QCD
Charities that qualify for a QCD are IRS-recognized entities known as 501(c)(3) organizations. To verify whether a particular charity qualifies for QCD, begin your search with the
Charities that do not qualify for a QCD
Some entities are involved with charitable giving but do not qualify for a QCD, including:
Donor-advised funds. These are vehicles created to manage charitable donations on behalf of charitable organizations.
- Private foundations. Although these foundations may receive some public funding, they are typically funded privately from one individual or a small group of people.
- Supporting organizations. These entities may support public charities, but they are not IRS-recognized entities themselves.
Types of IRAs that are eligible for QCDs
A QCD may go to an eligible charity from the following types of individual retirement accounts:
- Traditional IRA
- Inherited IRA
- Inactive Simplified Employee Pension (SEP) IRA
- Inactive Savings Incentive Match Plan for Employees (SIMPLE) IRA
Get professional guidance
Making these unique charitable contributions can provide multiple advantages—still, QCDs are not right for everyone. To gain a deeper understanding of QCDs and how they may fit into your financial situation, reach out to a local