By Nicolette Silva, Esq. – Director of Donor Relations
The rules governing the Qualified Charitable Distribution (“QCD”) seem to change every few years, and last year was no exception. Individuals who are required to take Required Minimum Distributions (“RMDs”) from their IRA but do not require the income often look for strategies that will help neutralize the tax effects of that distribution. A QCD is a tool that could be used to lessen or, in some cases, eliminate the effects of RMD income that would otherwise be subject to federal income tax.
The QCD enables IRA owners who are 701/2 and older to transfer up to $100,000 per year of IRA assets to public charities without being subject to federal income tax on the distribution. IRC § 408(d)(8). The amount of the distribution also counts towards the individual’s RMD for that tax year. To qualify as a QCD, an IRA distribution must meet the following criteria:
- The taxpayer must be at least 70 ½ years of age on the date of the distribution. IRC § 408(d)(8).
- The QCD must be made directly to a 501(c)(3) organization that is eligible to receive tax-deductible contributions. Note that donor advised funds, some private foundations, and many supporting organizations do not qualify.
- The distribution must have otherwise been eligible for a full charitable deduction as defined by IRC § 170. This is to ensure the taxpayer does not receive any benefits as a result of the QCD and eliminates gifts to “split interest” charitable vehicles, such as a Charitable Lead Trust.
- QCDs can only be made from individual IRAs or Roth IRAs (though making a QCD from a Roth IRA is likely moot). SEP IRAs and employer retirement plans are ineligible.
The “Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019,” which went into effect on December 31, 2019, modified some of the rules governing RMDs and QCDs.
The SECURE Act raises the age individuals must start taking minimum distributions from their IRAs from 70 ½ to 72. IRC § 401(a)(9)(C)(i)(I). This rule is applicable to individuals who reach age 70 ½ after December 31, 2019. The SECURE Act also eliminated the age limit for making tax-deductible contributions to IRAs—a nod to extended life expectancies and later retirement age for working individuals.
Interestingly, the SECURE Act didn’t change the age taxpayers are eligible to make a QCD. Taxpayers can still make up to $100,000 in QCDs per year beginning at age 70 ½. IRC § 408(d)(8)(A). While these QCDs will not count against future RMDs, they will reduce the total amount in the IRA (tax-free), thereby potentially reducing the amount of future RMDs. Beware, though, that the statute incorporates an “anti-abuse” rule for individuals who take a take deduction on contributions made to their IRAs and “double-dip” by also attempting to make a QCD. See IRC § 408(d)(8).
Despite these changes, the QCD remains a valuable tool for individuals to lessen the tax consequences of RMDs while supporting the mission of donors’ favorite charities.
Whether a QCD will benefit particular individuals will vary based on individual circumstances. We encourage you to confer with your legal and tax advisors for individual guidance.