Qualified Charitable Distribution (QCD)

How can you reduce your taxable income in retirement?

If you are age 70½ or older, you are required by the IRS to take a minimum distribution each year from your tax-deferred retirement accounts. This distribution is included as additional  income on your tax return and may push you into a higher tax bracket. To epartially or entirely reduce this required minimum distribution (RMD), some charitably inclined individuals may  consider making a qualified charitable distribution (QCD).

A QCD is a direct a direct distribution of assets from an IRA, made payable to a qualified charity. Amounts distributed as a QCD can be used to satisfy your RMD for the year (up to $100,000).. This distribution will also be excluded from your taxable income. This is a one step process. Do not take the distribution from your IRA directly and then donate it to the charity of your choice.

Why is this important? If you take the RMD as income, instead of as a QCD, your RMD will count as taxable income. Having higher taxable income can directly impact your eligibility for certain deductions and credits and your tax bracket. For example, keeping your taxable income level lower may also help reduce your potential exposure to the Medicare surtax.

QCD
 

 

Rules of Qualified Charitable Distribution (QCD)

  • You must be at least 70½ years old at the time you request a QCD. If you process a distribution prior to reaching age 70½, the distribution will be treated as taxable income.
  • To count as a current year RMD, the funds must come out of your IRA by December 31 of each year.
  • Assets must be directly transferred from the IRA to the qualified charity.  The check cannot be made payable to you. 
  • The maximum annual distribution amount that can qualify for a QCD is $100,000. 
  • Donor-advised funds and private foundations are not deemed as qualified organizations.