Has “gratitude” been a recurring theme on your mind in 2020? Have you been asking yourself, “How can I give back?” Are you thinking about your year-end charitable giving?
If you are 70 ½ or older, one charitable giving option you can take advantage of is a Qualified Charitable Distribution (QCD). Essentially, a QCD is a way for retirees to donate a Required Minimum Distribution (RMD) from their retirement account directly to charity, thereby avoiding paying ordinary income taxes on that RMD while supporting their favorite non-profit organizations. To put it even more simply, QCDs are charitable contributions from IRAs.
Qualified Charitable Distributions—Let’s Start with the Basics
Think a QCD might be right for you? Here are some important things to know:
- QCDs can be made from a traditional IRA, inherited IRA, inherited Roth IRA, SEP IRA, or SIMPLE IRA, however you cannot be actively receiving any employer contributions to the account (SEP or SIMPLE).
- You must be at least 70 ½ years old at the time you plan to make the QCD.
- Your QCD can satisfy your RMD if you’re over age 72 (the SECURE Act of 2020 raised the age you must start taking RMDs from 70 ½ to 72).
- If you’re single, the maximum QCD amount is $100,000; if you’re married, the maximum amount is $200,000 per couple, but no single distribution can be greater than $100,000.
- You are not eligible to gift a QCD to a private foundation or donor advised fund.
- Only pre-tax dollars can be given to a qualifying charity; after-tax dollars cannot be used for a QCD.
Benefits of Making Charitable Contributions from IRAs
The CARES Act earlier this year eliminated RMDs for 2020, meaning that if you are over the age of 72, you do NOT have to take a distribution from your retirement account this year.
So, if you aren’t required to distribute money from your retirement accounts, why should you still consider making a charitable contribution using funds in your IRA?
1. You can lower your taxable income
When you make a QCD, the amount donated is not included in your taxable income (whereas distributions from a non-Roth retirement account will be). Having a lower taxable income may reduce the impact on certain tax credits and deductions, including lowering what portion of your Social Security benefits may be taxable and lowering your how much you’ll pay for Medicare premiums. Consult with your tax advisor to see how making a QCD could impact your 2020 taxes.
2. Using the standard deduction? No problem!
Usually, the tax benefits of charitable giving are only for people who itemize deductions on their federal taxes. However, QCDs don’t require you to itemize—you report the amount donated to charity on line 4a of your 1040 form—so if you’re using the now-higher standard deduction (which an estimated 90% of households are[i]), you won’t be missing out on the opportunity to reduce your tax bill.
3. You can lower your RMD next year
Your RMD is determined by taking the value of your retirement account on December 31 and dividing it by a payout factor based on your age—a lower account value means a lower RMD. Even though you don’t need to take an RMD this year, doing a QCD this year could mean that your RMD next year may be less, thereby lowering your taxes owed.
4. If you made after-tax contributions, you could create a larger post-tax balance in your IRA
Does your IRA include after-tax dollars? If yes, then be aware that while the dollar amount contributed after-tax will be tax-free, the growth on those funds will be taxable when you take it out of your account. Because QCDs can only be taken with pre-tax dollars, it can be a good tool to reduce the taxable portion of your IRA distributions or leave a larger post-tax balance available for Roth conversions.
Some additional explanation on “after-tax dollars”: most contributions to an IRA consist of “pre-tax dollars,” meaning you were able to take a tax deduction when you made the contribution. However, you may have made nondeductible contributions if you (or your spouse) were enrolled in an employer-sponsored retirement plan and your modified adjusted gross income exceeded the applicable limit for your filing status. Or maybe you rolled over funds from an employer plan that allowed after-tax contributions.
5. The market has recovered
I don’t need to remind you about the market drop in March 2020. Good news is the market has recovered. This means you aren’t distributing funds from your retirement accounts when returns are down, lowering what’s called your “sequence of return risk”—this is when a high proportion of negative returns particularly at the start of your retirement (when you are starting to withdraw income) has a lasting negative effect on your retirement account values over time.
6. The need has never been greater
COVID has put unprecedented demand on charities’ services and strain on their ability to meet these needs. Surveys by the Charities Aid Foundation of America earlier this year reported that 97% of charitable organizations surveyed reported being negatively impacted by the pandemic,[ii] with 50% expecting the pandemic to decrease their revenue by more than 20% in the next 12 months.[iii] If you have the ability to donate, now is the time when your dollars could do the most good.
QCDs are a lesser known, but powerful tool. If you’re 70 ½ or older, have more retirement income than you need to fund your lifestyle and you’re charitably inclined, give Monument a call to talk through whether making a charitable contribution using funds in your IRA could make sense for you.
Want to ensure that your donation makes an impact? Check out our article, 5 Ways to Make Your Charitable Giving Count.
IMPORTANT DISCLOSURE INFORMATION
[iii] Charities Aid Foundation of America. The Voice of Charities Facing COVID-19 Worldwide – Volume 2. 2020.
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