QCDs: A great way to give yourself (and the charities you love) a gift this year


IIf you’re 72 or older and have a Traditional IRA, you’ve probably been familiar with the exercise: Each year, you need to withdraw a minimum dollar amount from your retirement account. These Minimum Required Distributions, or RMDs, have been removed for 2020 due to the coronavirus pandemic, but they are back for 2021. Your RMD amount depends on several factors, including your age, life expectancy, and balance. of your account, and will vary each year. The withdrawal percentage usually starts around 4% of your account balance and can go as high as 53%. Failure to withdraw your RMD within the applicable time limits can result in a hefty penalty: 50% of the amount you neglected to withdraw.

The tax hit of taking your RMD can be a nasty surprise if you don’t prepare for it properly. When you withdraw money from your IRA, including withdrawals to meet RMD requirements, it is considered taxable income and taxed based on your income bracket. In 2021, this can reach 37% for some people. And in some cases, your RMD could push you into a higher tax bracket.

What if you don’t need the money that you are essentially required to take out? Can you meet your RMD obligations while avoiding the corresponding income tax? This is where qualified charitable distributions can be a smart option.

The Benefits of Qualifying Charitable Distributions

A qualified charitable distribution, or QCD, is a donation that you make directly from your IRA to a qualified public charity that would otherwise be a taxable distribution. QCDs are a smart strategy to have in your tax planning toolbox – and they allow you to make an impact by supporting the causes that matter most to you.

Here are three reasons why you might want to consider doing a CDQ this year:

1. QCDs allow you to complete your RMD without increasing your taxable income.

You can donate up to $ 100,000 in QCD each tax year, and you can “count” that amount to meet your RMD. In some cases, you may be able to complete your entire RMD by creating a QCD. And you can do QCDs to as many qualified charities as you want, up to the limit of $ 100,000.

Since a QCD is distributed directly from your IRA to the charity, you do not have to pay income tax as you would if you took the distribution for yourself. This makes QCDs a smart option for retirees who don’t need the extra money from their IRA – they can meet the RMD mandate without this distribution being included in their annual income.

2. You do not have to itemize the deductions to take advantage of the tax advantages of a QCD.

The Tax Cuts and Jobs Act of 2017 increased the standard deduction, so more Americans are choosing not to itemize deductions when filing their taxes. With QCDs, you don’t make a deduction like you do with other charitable donations. Instead, your QCD amount is excluded from your gross income. Doing a QCD is a smart way for people who don’t itemize deductions to continue to receive tax benefits on their charitable donations.

3. QCDs maximize the impact you have on charitable causes.

As we age, many of us reflect on what legacy we want to leave behind and how we will be remembered after we leave. CDQs can be a smart way to serve the causes you care about. The tax savings they offer allow you to maximize your charitable impact.

Here’s an example of how creating a CDQ might work for you and the charities you care about. Let’s say your IRA balance was $ 500,000 at the end of the previous year and your RMD for that year is 3.9% (roughly $ 19,500). Even if you don’t need the funds, you must withdraw this amount from your IRA by the end of the year.

If you withdraw this money for yourself, it is included in your taxable income, which means you will have to pay income tax. But let’s say that instead of taking that distribution of $ 19,500, you decide to do a QCD of that amount directly from your IRA. By doing this, you are filling out your RMD for the year, and you don’t have to add to your taxable income (or run the risk of slipping into a higher tax bracket). Not to mention that your donation is used for a charitable cause that is close to your heart. With a QCD, everyone wins.

How to do a CDQ

If you wish to make a QCD, you must complete your donation before December 31, 2021, if you want it to apply to your RMD for the 2021 tax year. It is important to make these distributions as soon as possible , as charities and custodians are often very busy from mid-December to the end of December processing year-end donations.

To do a QCD, you will need to complete a Charitable IRA Distribution Form. You will include your account information and the nonprofit organization’s taxpayer identification number, and submit it to your IRA custodian. Your custodian may require you to have the form signed in the presence of a notary, so read it carefully to avoid any last minute hurdles. You should also notify the charity of your donation, so they can anticipate the donation and be ready to send you a donation receipt or other written acknowledgment of your contribution.

Some charities also offer online tools to streamline the QCD donation process for donors. You can check the donations page on the website of any charity you want to support to see if they offer this service.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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