Investment Strategies

Qualified Charitable Distributions: The Triple Threat You Probably Didn’t Even Know Existed

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by Alli Thomas

Oct 2, 2018

If you’ve been following this blog, you know that we often tout the advantages of having a Roth IRA.

 

But what if you only have a traditional (pretax) IRA? Not to worry – you can still convert it to a Roth IRA, though doing so can result in some hefty tax implications.

 

If you’re over age 70 ½, those tax implications may be even more outsized. You’ll still be required to take a minimum distribution from your traditional IRA even if you decide to convert it to a Roth IRA in the same year and your RMD amount cannot be included in the conversion.

 

But here’s one smart way to satisfy your RMD, minimize the tax implications of a Roth IRA conversion during an RMD year, and do good at the same time: make a Qualified Charitable Distribution (QCD).

 

Some Fast Facts About Qualified Charitable Distributions

 

  • QCDs are only an option for those who are 70 ½ or older.
  • The maximum aggregate annual QCD amount is $100,000.
  • If you are married filing jointly and your spouse is also at least 70 ½, he or she may make a QCD from his or her own IRA during the same tax year for up to $100,000.
  • The QCD must come out of your IRA by your RMD deadline (typically December 31).
  • The charity to which you make a QCD must be a 501(c)(3); QCDs are not permitted to be directed to private foundations, supporting organizations, or donor-advised funds.

 

From an administrative perspective, making a QCD can be a bit tricky. QCDs are reported as normal distributions on your annual 1099-R form, so you’ll need to keep good records and remember to report the distribution as a nontaxable QCD at tax time. Make sure you receive and retain a written acknowledgement of your QCD from the charity or charities to which you contributed.

 

How Do Qualified Charitable Distributions Work?

 

The process of making a QCD may vary by custodian. Most custodians require you to complete a form or call to request the QCD. Typically, once the money is withdrawn from your IRA, the custodian sends the check directly to the charity on your behalf. Under no circumstances should the QCD check be made payable to you. Even if you then send the proceeds to your charity of choice, it’s no longer considered a QCD.

 

As is the case for taking RMDs, it’s best not to wait until close to year end to make a QCD. If the charity does not cash your QCD check until after year end, it won’t count towards satisfying that year’s RMD.

 

If minimizing your tax implications and fulfilling your RMD while supporting your favorite causes sounds almost too good to be true, it definitely isn’t! Intrigued? Start by requesting a FREE Results In Advance Planning evaluation today to see how we can help your retirement plan.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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