Understanding Qualified Charitable Distributions (QCDs)

As you build your financial legacy, deciding how you want to leverage charitable contributions can be a deeply fulfilling endeavor, but may also provide certain financial advantages. Qualified Charitable Distributions (QCDs) present a valuable opportunity to support the causes you care about while also helping you manage your retirement income.

Here are some factors to consider and how they’ve changed based on recent legislation, such as the SECURE Act.

What Is a Qualified Charitable Distribution (QCD)?

Qualified Charitable Distributions (QCDs) allow individuals aged 70½ and older to make direct contributions from specific retirement accounts to eligible charities without having to recognize these distributions as taxable income. Following the enactment of the SECURE Act 2.0, individuals are now required to begin taking required minimum distributions (RMDs) at age 73. However, your QCDs can be deducted from this RMD amount, enabling you to manage your retirement income more effectively.^1,2,3

Age and Account Requirements

In order to qualify for a QCD, you must be at least 70½ years old. Distributions can be made from an IRA. You can use SEP IRAs or SIMPLE IRAs so long as they are inactive, meaning that you’ve made no contributions to the account in the year the QCD is taken. However, it’s important to note that 401(k)s and other non-IRA retirement accounts do not qualify for QCDs.

In most circumstances, once you reach age 73, you must begin taking RMDs from a traditional IRA, SEP IRA, or SIMPLE IRA account. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.

To qualify for tax- and penalty-free withdrawals of earnings from a Roth IRA, distributions must satisfy a 5-year holding requirement and occur after the account holder reaches age 59½. Tax-free and penalty-free withdrawals may also be permitted under specific circumstances, such as the account owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.¹

Limits and Adjustments

In 2024, the maximum annual limit for QCDs is currently set at $100,000, an amount that is adjusted each year for inflation. Therefore, it’s essential to stay informed about this annual cap as it may influence your donation strategy.¹

Financial Advantages

In addition to helping you support your preferred charities, QCDs can also help you enhance your tax strategy. While IRA withdrawals are generally taxable, QCDs are excluded from your taxable income, meaning they don’t increase your adjusted gross income (AGI). For some, this offers an opportunity to balance their charitable giving with effective tax management.

QCDs can also help you satisfy all or part of your annual RMD amount. However, if you end up contributing more than your RMD, keep in mind that the excess amount cannot be applied to next year’s RMD.

You will also benefit from the fact that you don’t need to itemize deductions to take advantage of a QCD, allowing you to use the standard deduction.^1,3

Final Thoughts

Always verify the status of your chosen charity using the IRS Online Search Tool or by consulting a professional knowledgeable about the organization’s tax status. Remember, for a donation to qualify as a QCD, it must be transferred directly from your IRA to the charity. If you withdraw the funds before donating, the contribution will not qualify as a QCD and will be subject to taxation.

As with most financial strategies, your state may have specific rules that impact how QCDs are treated. Consult with a financial or tax professional about specific regulations that may affect your giving strategy. If you have questions about whether QCDs may make sense as part of your retirement plan, please feel free to reach out.

¹IRS.gov, 2024

²If you turn 73 in years 2023-2032, the starting age for RMDs is 73 and the first RMD must be taken no later than April 1 of the year following the year you turn 73. If you turn 74 after December 31, 2032, the starting age for RMDs is 75.

³This article is for informational purposes only and is not a replacement for real-life advice. Consult with your tax, legal, and accounting professionals before modifying your retirement income strategy.