Qualified charitable distribution from your IRA

The Internal Revenue Code does not allow you to keep retirement funds in your account indefinitely. Generally, you have to start taking withdrawals from your IRA and most other retirement plan accounts when you reach age 70½, or if your 70th birthday is July 1, 2019 or later, you do not have to take withdrawals until you reach age 72. However, Roth IRAs do not require withdrawals until after the death of the owner.

• Your required minimum distribution (“RMD”) is the minimum amount you must withdraw from your account each year.
  • Check with your IRA administrator for who can provide the RMD amount for the year. Also, the IRS provides easy to use tables to calculate the RMD which is based upon the value of your IRA or other retirement account as of the December 31 of the previous year.
  • You can withdraw more than the minimum required amount each year. However, amounts distributed in excess of the RMD in one year do not reduce the amounts required in future years.
  • Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
  • If you do not take any distributions, or if the distributions are less than the RMD, you may have to pay a 50% excise tax any amount that was less than the RMD.

Qualified Charitable Distributions (“QCDs”)

Generally, a qualified charitable distribution is an otherwise taxable distribution from an IRA owned by an individual who is age 70½ or older that is paid directly from the IRA to a qualified charity such as the Center for Coastal Studies.

• Those who meet the age requirement can transfer up to $100,000 per year directly from an IRA to an eligible charity without paying income tax on the transaction.
• The QCD counts toward your requirement that you make a RMD for the calendar year without having to include that amount in taxable income.
• You can make a QCD that exceeds your RMD of a given year.

By lowering your income subject to tax and then perhaps allow you to use the standard deduction instead of itemizing your deductions, the QCD rule can effectively reduce your income taxes. 

Qualified Charitable Distributions – example

Facts: Peter and Connie are both 73 and retired. Both have invested well and don’t expect to need all of their retirement assets for living expenses. They rolled over their employer 401k plans into individual IRAs after they retired.  Their combined RMDs this year is $40,000. They have paid off the mortgage on their home and are able to deduct on their tax return as an itemized deduction only two items: (1) $10,000 which is the maximum allowable deduction for state and local taxes and (2) annual charitable contributions which typically in their case amounts to  $400.  This year they would like to make two special charitable contributions– one to their alma mater and the other to the Center for Coastal Studies, each amounting to $20,000. They could use cash from their savings account or from the IRA RMD to make the two special gifts, and would claim the total of $50,400 as an itemized deduction on their tax return.  Is there a better way to accomplish these charitable gifts other than using cash?

Instead of using cash, Peter and Connie could direct their IRA administrator to transfer $20,000 directly to their alma mater and $20,000 to the Center for Coastal Studies.  These QCDs will satisfy their RMD for the year, but will not be included in taxable income.  Removing the IRA distribution from income is the equivalent to a deduction. Because they are both over 65, Peter and Connie can now claim both the standard deduction and age exemptions of $27,400. They now would have the equivalent of $67,400 of total deductions–$17,400 more than had they given cash and claimed the gifts as itemized deduction.

For more information about QCD’s, please contact Sue Nickerson, Director of Development, at 508-487-3622 x 102 or [email protected]. If you would like to download a sample letter directing your IRA custodian to initiate a transfer of funds from your IRA to CCS, please click here: Sample QCD letter