Giving From Your IRA: How a Qualified Charitable Distribution May Help Reduce Taxes in Retirement

For many people, retirement is a time when the focus begins to shift. After spending decades working, saving and preparing for retirement, the question may become less about “How much can I accumulate?” and more about “How can I use what I have wisely?”

For retirees who have accumulated money in a Traditional IRA and do not necessarily need all of their annual distributions for living expenses, charitable giving may provide an opportunity to accomplish two goals at once: supporting organizations they care about while potentially reducing their taxable income.

One strategy worth discussing with your financial and tax professionals is a Qualified Charitable Distribution, commonly called a QCD.

What Is a Qualified Charitable Distribution (QCD)?

A Qualified Charitable Distribution allows an eligible IRA owner to have money sent directly from an IRA to an eligible charitable organization.

For someone who regularly gives to a church, ministry, nonprofit or other qualified charity, this can be an important distinction.

Instead of taking money out of the IRA, potentially recognizing it as taxable income, and then writing a personal check to the charity, an eligible individual may be able to have the IRA custodian send the contribution directly to the qualifying organization.

When the IRS requirements are satisfied, the QCD generally is excluded from taxable income.

Who Can Make a QCD?

To qualify for a QCD, the IRA owner generally must be age 70½ or older at the time the distribution is made.

That age is important because it is different from the age at which many retirees are required to begin taking Required Minimum Distributions (RMDs).

For many IRA owners today, RMDs begin at age 73. However, eligibility to make a Qualified Charitable Distribution can begin at age 70½.

This creates a potential charitable-planning opportunity even before RMDs begin.

Can a QCD Count Toward Your Required Minimum Distribution?

Yes. For those who are already required to take an RMD, a Qualified Charitable Distribution may count towardall or a portion of the RMD, assuming the QCD requirements are satisfied.

Consider a simplified example.

Suppose a retiree is required to distribute $20,000 from an IRA this year but only needs $10,000 for personal expenses. The retiree also normally gives $10,000 per year to a church or other qualified charitable organization.

Rather than withdrawing the entire $20,000 personally and then making charitable gifts from a checking account, the retiree might consider having $10,000 sent directly from the IRA to the qualifying charity.

The remaining $10,000 could then be distributed to the retiree.

In this simplified example, the $10,000 QCD may satisfy that portion of the RMD without that amount generally being included in taxable income.

This example is hypothetical and is provided for illustrative purposes only. Individual tax circumstances vary.

Why Can a QCD Be More Tax-Efficient Than Writing a Check?

This is where QCD planning can become particularly interesting for retirees.

Many taxpayers use the standard deduction rather than itemizing deductions. If you do not itemize, making a charitable contribution by writing a check may not provide the same federal income-tax benefit that an itemized charitable deduction could provide.

A QCD works differently.

Rather than relying on a charitable deduction, an eligible QCD is generally excluded from taxable income.

In other words, the potential benefit occurs on the income side of the tax return, rather than through claiming a separate charitable deduction.

That distinction may make QCDs worth discussing for retirees who already intend to give to charity.

Could Lower IRA Income Affect Other Retirement Taxes?

Potentially, which is another reason tax planning in retirement should look at the entire financial picture.

Adjusted Gross Income, or AGI, can affect several areas of a retiree's financial life. Depending on an individual's circumstances, income can play a role in the taxation of Social Security benefits, Medicare income-related premium adjustments and other tax calculations.

Because a properly completed QCD generally isn't included in taxable income, it may help manage taxable income compared with taking an otherwise taxable IRA distribution personally and subsequently donating the money.

However, the results depend on each person's individual tax situation. A QCD should not be viewed as a guarantee of lower overall taxes.

Giving to Your Church From an IRA

For many of our clients, charitable giving isn't simply about receiving a tax benefit.

It is about faith, generosity and supporting organizations that matter to them.

Someone who has faithfully given to a church for many years may continue giving throughout retirement. If that individual is over age 70½ and has money accumulated in a Traditional IRA, it may be worth asking:

“If I am already planning to give this money away, is there a more tax-efficient way to make the gift?”

A Qualified Charitable Distribution may be one answer.

The same concept can apply to other eligible charitable organizations that are important to you.

The key is that the organization must meet the requirements to receive a QCD, and the distribution generally needs to go directly from the IRA to the qualifying charitable organization.

An Important QCD Mistake to Avoid

One of the most important QCD rules is also one of the easiest to misunderstand.

Generally, you should not withdraw the IRA money personally, deposit it into your bank account and then write a check to the charity expecting it to qualify as a QCD.

For QCD treatment, the distribution generally must be made directly from the IRA to the eligible charitable organization in accordance with IRS requirements.

That's why planning ahead with your IRA custodian, financial professional and tax professional can be important.

You Don't Get to Use the Tax Benefit Twice

A QCD isn't a way to exclude the IRA distribution from income and claim the same amount as a charitable deduction.

If the QCD is excluded from income, you generally cannot also claim that amount as a charitable contribution deduction.

Think of the potential benefit as changing how the charitable gift is treated for tax purposes, rather than creating two tax benefits from the same gift.

How Much Can You Give Through a QCD?

Federal law places an annual limit on the amount that can qualify for QCD treatment, and that limit is now adjusted periodically for inflation.

Because tax limits can change from year to year, we believe it is better to verify the current limit before implementing a charitable giving strategy rather than relying on an older number.

Married couples may potentially each make QCDs from their respective eligible IRAs, subject to the applicable individual limits and requirements.

Is a Qualified Charitable Distribution Right for You?

A QCD may be worth discussing if you:

• Are age 70½ or older.

• Own an IRA that is eligible for QCD treatment.

• Regularly give to your church or other qualified charities.

• Don't need all of your IRA distributions for living expenses.

• Are taking Required Minimum Distributions.

• Want to explore ways to manage taxable income during retirement.

• Typically use the standard deduction rather than itemizing.

• Want charitable giving to be part of your overall retirement and financial plan.

A QCD isn't appropriate for everyone, and there are important rules regarding eligible accounts, eligible charitable organizations, timing, documentation and taxation.

Retirement Planning Is About More Than Accumulating Money

We spend much of our working lives asking questions such as:

How much should I save?

How should I invest?

Will I have enough to retire?

Once retirement arrives, another set of questions becomes important:

How should I take money out?

How can I manage the potential tax impact of those distributions?

How can my financial resources support the people and causes that are important to me?

For retirees with a heart for charitable giving, a Qualified Charitable Distribution can be one tool to consider as part of that conversation.

If you're already giving to your church or another charity and you're taking—or approaching the age for—IRA distributions, it may be worthwhile to review whether a QCD strategy could fit into your retirement income and charitable giving plan.

At Shepherd's Way Financial, we believe financial planning isn't simply about accumulating assets. It's about helping you make thoughtful decisions with the resources you've worked hard to build and aligning those resources with the people, priorities and causes that matter to you.

Before implementing a QCD or other tax-planning strategy, consider consulting with your financial professional and qualified tax professional or CPA to determine how the rules apply to your individual circumstances.

Important Disclosure

This material is for general educational and informational purposes only and is not intended to provide individualized investment, tax or legal advice. Tax laws and regulations are subject to change, and individual circumstances vary. Consult with a qualified tax professional or CPA regarding your specific tax situation.

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.