Year-End Planning – Consider Satisfying RMDs And Charitable Giving With QCDs

November 19, 2016

Robert Katz, CFP®


What is a Qualified Charitable Distribution?

A Qualified Charitable Distribution (QCD) is a direct transfer of funds from an IRA to a qualified charity. QCDs may be counted towards satisfying minimum distribution requirements for certain tax-deferred retirement accounts. First introduced in 2006 as a temporary provision, the rules were finally made permanent as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

What are the rules for QCDs?

Some of the core requirements for making a QCD are as follows:

  • The IRA owner must be at least age 70 ½ and subject to minimum distribution requirements.
  • The maximum dollar amount is limited to $100k per taxpayer per year.
    • Note – a married couple can each do up to $100k as long as distributions are coming from his/her respective IRA.
  • Only distributions from IRAs (traditional or rollover) are eligible, SEP and SIMPLE Plans are only eligible if they are inactive, employer retirement plans are not eligible.
  • The distribution must go directly to a qualified public charity – the QCD cannot go to a private foundation or a donor-advised fund (at this time).

Note – if passed, the proposed CHARITY Act (S. 2750) will allow QCDs to be directed to donor-advised funds.

What are the benefits of a QCD?

  • It is deemed to go towards satisfying a required minimum distribution (RMD).
  • The distribution avoids any tax implications – the distribution is not included as income on the taxpayer’s Form 1040, and the taxpayer does not receive a charitable deduction on Schedule A.
  • Since a QCD is not included in income, it will not be factored into a taxpayer’s Adjusted Gross Income (AGI) which can have a substantial impact on various items, most notably:
    • The deductibility of certain itemized deductions with thresholds, such as medical expenses and miscellaneous itemized deductions
    • The phase-out of itemized deductions under the Pease limitation
    • The personal exemption phase-out
    • Medicare annual Part B premiums and Part D surcharges
    • State income tax calculations
    • And more…

A brief example of how the QCD can be a powerful planning strategy is detailed below in a simple hypothetical tax projection for a married couple living in Massachusetts with RMDs of $100k and a desire to contribute the same amount to charities:

*The taxability of Social Security benefits is based on taxpayer’s Modified AGI (MAGI) – up-to 85% may be taxable

**Assumes charitable contributions of $100k are made from cash or other assets

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