fbpx

How a Qualified Charitable Distribution May Be One Of The Best Tax Moves for a Retiree

As you get closer to, or into, your required minimum distributions, you may find that the requirement to remove a percentage of funds from your tax-deferred retirement accounts is a bit of a tax burden.  Of course, if you need those funds to pay your monthly expenses, there’s not much you can do except bite the bullet and pay the taxes owed.  But if you don’t need the money, and you’re only removing the funds because the government requires you to do so, it’s really nothing more than an unnecessary added tax to you.

A Qualified Charitable Distribution May Be Able To Help

This is where something called a Qualified Charitable Distribution, or QCD, may be able to help.  The only requirements here are that you don’t need the IRA distributions to fund your living expenses, AND you plan on giving money to a qualified public charity sometime during the tax year.

The strategy works like this: once you’re at least age 70 ½, you decide how much money you’d like to give to your qualified charity (or charities).  You then instruct your IRA custodian to transfer that amount of money (or some portion of it) directly from the IRA to that charity, bypassing you in the process completely.  By doing it this way, that amount will not appear on your tax return as a taxable event to you.  The amount you give can be as much as you want, up to a combined $100,000 for the entire tax year, and that amount will count toward satisfying your RMD.

The combined result is that by sending the money via a QCD directly from your IRA, your charity gets the money, AND it counts towards your Required Minimum Distribution for this year for your IRAs, AND it’s not part of your Taxable Income for that year.  Not a bad deal!

What Really Happens When You Take the Required Minimum Distribution For Yourself?

Now what if you didn’t do the QCD, took the RMD for yourself as normal, and then just turned around and wrote a personal check to the charity?  Logic would dictate that the RMD is taxable coming in to you, the check to the charity is potentially deductible going out, so the two of them just cancel each other out.  But logic and tax law rarely go together.

What really happens is that when you take the RMD for yourself and add it to your tax return, as you would normally do, that income is what’s called “above-the-line,” meaning it adds to your adjusted gross income for the year.  If you can itemize (and most people cannot anymore), that deduction happens farther down your tax return, below the AGI line.  So now your Adjusted Gross Income has gone up, thus potentially increasing the taxability of your Social Security.  It can also increase your Medicare premiums, as well as your Medicare surtax on capital gains.  It may also phase out some of your itemized deductions, among other things.  So doing it the non-QCD way creates a kind of ripple effect across your tax return, and not in a good way.

By doing a Qualified Charitable Distribution, your AGI does not increase by the IRA distribution sent to the charity, thus potentially avoiding those issues mentioned a moment ago.  And here’s a bonus: if you don’t itemize and thus can’t deduct your charitable contributions, by doing a QCD, you get what amounts to a de facto deduction.

A Few Rules for Doing a Qualified Charitable Distribution:

  1. The IRA owner must be at least age 70 ½ to do this.
  2. There’s a $100,000 per year donation limit through a QCD per taxpayer, so a married couple can each do up to $100,000 if each distribution comes from his or her respective IRA.
  3. This works only for individual IRAs, and not from any kind of employer-sponsored retirement plan, like a 401(k).

One key issue to watch out for.  The 1099R that you receive will NOT list the QCD as a separate distribution.  It is just part of the total distribution that was sent from your IRA.  Since there’s no code, your tax preparer won’t know about it and they’ll just list it as part of your normal “Taxable” distribution.  So make sure you tell your tax preparer that you did the QCD.

One final thing here, which is a change from a couple of years ago.  If you’ve made any contributions to your IRA post age 70 ½, which we can do now thanks to the SECURE Act, those contributions have to come out first, and cannot be turned around to be used as QCDs.  So the rules effectively require a “LIFO” treatment that ensures post-age-70 1/2 contributions will first and foremost be used to reduce future QCDs.

But hey, that’s just a minor blip. A QCD still can make sense for anyone who’s charitably inclined, and who doesn’t need their RMD to fund their living expenses. If you want to know whether you may benefit from this QCD strategy, the advisors here at Lucia Capital Group do this kind of thing every single day.  Just give us a call – we’re here to help.

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investments purchased and/or investment strategies devised by Lucia Capital Group (“LCG”)) will be either suitable or profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

Examples cited are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.
Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

Start Your Strategy

Personalized investment advice and support to help grow your portfolio