By The Welch Group
We at The Welch Group prioritize giving back to our communities and living generously. If you can relate, you’re as like-minded as our clients. You know that the world goes far beyond just you and your family and you want to leave your mark on it, making a difference when and how you can. You are grateful for the opportunities you have received and want to pass it forward in a meaningful way.
That’s your purpose in giving to charity; our job is to help you do it in the wisest way possible. Every dollar we can save you in taxes is another dollar you can use to make the world a better place.
And as the cornerstone of retirement planning cash flow, required minimum distributions (RMDs) can be used toward this end. Instead of transferring the money into your bank account, consider sending your RMDs straight to a charity, which is called a qualified charitable distribution (QCD).
Benefits of Making a Qualified Charitable Distribution
While cutting out yourself as a middle man saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first.
When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.
Are You Eligible to Make a Qualified Charitable Distribution?
Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made.
In addition to having the right kind of account, these other requirements must be met: (1)
- You must be age 70½ or older.
- To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
- QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
- Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
- Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.
Is Your Charity Eligible to Receive a Qualified Charitable Distribution?
After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.
On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are: (2)
- Private foundations
- Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
- Donor-advised funds managed by public charities on behalf of individuals, families, or organizations
How Are Qualified Charitable Distributions Reported?
Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding.
Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified.
Work With a Professional
We understand that giving to charity is a top priority for you. You’re going to give regardless, so why not do so in the most tax-efficient manner possible? QCDs are a great opportunity for anyone who is required to take minimum distributions from their retirement accounts.
Many specific rules and requirements must be met in order for distributions to qualify for exempt status, so it’s a good idea to work with an experienced financial professional to ensure you make a QCD the right way. If you’re interested in learning more about qualified charitable distributions, The Welch Group is here to help. If you’d like to partner with a financial planner who strives to simplify financial management and help you secure your financial future so you can focus on what matters most, schedule an introductory phone call by reaching out to us at 205-879-5001.
About The Welch Group
The Welch Group is a fee-only, employee-owned wealth management firm committed to enriching the lives of their clients. Founded in 1984, The Welch Group helped pioneer the fee-only financial planning and investment management movement and has continued to put the needs of clients first ever since. Offering wealth management and family office services to retirees and young professionals, The Welch Group team strives to simplify financial management and help clients secure their financial future so they can focus on what matters most. Our personalized and comprehensive approach helps clients plan for their goals, needs, and concerns, including estate planning, cash flow, charitable and tax planning, and retirement strategies.
As financial advocates, the financial advising team is made up of educated, experienced, and dedicated professionals, including Certified Public Accountants, a Juris Doctorate (JD), individuals with MBA degrees, and CERTIFIED FINANCIAL PLANNER™, Accredited Estate Planner®, and Chartered Financial Analyst® professionals. The Welch Group is passionate about giving back, creating positive ripple effects in our community by supporting local charitable organizations through The Welch Group Foundation. To learn more about what we do and how we can help, explore our website and schedule a complimentary consultation.
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