Individual retirement accounts (IRAs) are a popular way to save for your retirement in addition to a 401(k) plan and can be either pre-taxed or tax-deferred (learn the difference here). For those who choose the tax-deferred option on their IRA, a qualified charitable distribution (QCD) could reduce the amount of tax you have to pay once the time comes to start withdrawing. Learn what a qualified charitable distribution is by reading the qualified charitable distribution rules below.
When Can You Make a Qualified Charitable Distribution?
If you own an IRA and are aged 70½ or older, you are obliged by the IRS to make required minimum distributions (RMDs) from your tax-deferred account. However, you can reduce the amount of tax you need to pay by putting some or all of your RMDs towards qualified charities and claiming these as deductible distributions.
The IRS has placed a $100,000 limit (per person for married couples filing jointly) on QCDs for each tax year, and donations any larger than that are considered a taxable distribution.. However, you can donate more than your individual required minimum distribution amount as long as it doesn’t exceed the $100k limit.
Why Making a Qualified Charitable Distribution is a Smart Idea
Before the Tax Cuts and Jobs Act (TCJA) was passed in 2017, the standard deduction rate was lower than it is now, and fewer limits were placed on large deductions such as property taxes, state income taxes, and mortgage interest. Today, few individuals will be able to itemize their deductions, reducing the tax benefits available for charitable contributions in general.
By making qualified charitable distributions in the RMD phase of life, you can reduce your taxable income by the amount of the QCD made from your IRA and continue to receive tax benefits for supporting philanthropic causes. This strategy also means that you don’t have to worry about itemizing your deductions in any given year.
How to Make a Qualified Charitable Distribution
The rules for making a qualified charitable distribution are simple and straightforward:
- Choose a qualified charity from the list provided by the IRS (see above).
- Write a check directly out of your IRA (for Schwab and Fidelity clients).
- For all other clients, print out an IRA distribution form to have a check made payable to the charity, then sign the check.
Remember, according to the qualified charitable distribution rules, you do not need to itemize every deduction.
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Now you know what a qualified charitable distribution is and how to make these donations from your IRA, you can go ahead and plan the qualified charitable distributions that best suit your interests and resources.