Qualified Charitable Distributions for RMDs

Qualified Charitable Distributions (QCDs) are vital for those who must take an annual required minimum distribution (RMD) but seek a tax-advantaged strategy that may help lower their adjusted gross income (AGI). Using a QCD strategy, one can transfer a portion or all their RMD directly from their IRA to a qualified charitable organization while receiving tax benefits for their donation.

The tax advantages of QCDs

Typically, RMDs increase one’s AGI by the amount of the distribution, which may result in higher state and federal taxes. However, QCDs are excluded from the AGI, reducing the likelihood the donor will move into a higher tax bracket. QCDs may also help decrease the donor’s chance of receiving the Medicare High-Income Surcharge.

The IRS guidelines for QCDs require that the distribution be paid directly from the IRA trustee to the qualified charitable organization. Therefore, the donor must ensure the IRA trustee can distribute the funds directly to the charitable organization. Direct transfer helps keep the RMD amount out of the donor’s taxable income, qualifying it as a tax-free transfer.

Here are other things to know about QCDs for tax year 2023:

• QCDs are capped at the federal tax level at a maximum of $100,000 per individual per year; couples can leverage $100,000 each, amounting to $200,000 if both are eligible for RMD.
• Donors must be at least 70½ years of age; for 2023 the RMD age is 73.
• QCDs are not subject to the charitable deduction income limits.
• QDCs are exempt from state taxes in most states, but not all; consult a tax professional regarding your situation.
• The QCD reduces the donor’s taxable income for determining the Medicare Surcharge on Parts B and D.
• The QCD must directly transfer from an IRA to a qualified charitable organization.
• Donor-advised funds (DAFs) and private foundations (PFs) are excluded from QCD transfers.
• Contributing to an IRA may result in a reduction of the QCD amount one can deduct.

QCDs can fund a split-interest gift, such as a Charitable Gift Annuity (CGA), Charitable Remainder Annuity Trust (CRAT), or Charitable Remainder Unitrust (CRUT). These strategies remove significant income while retaining cash flow for the donor while they’re living; once the donor passes, the remaining gift transfers to the charitable organization.

QCD strategies involving CGAs, CRATs, and CRUTs can be complex. Therefore, consult financial, tax, and legal professionals beforehand to help ensure these strategies are appropriate for your situation. Note that in order for CGAs and Trusts to qualify for a QCD transfer, the following conditions must be met:

• CGAs and Trusts must be funded directly from the QCD.
• Income can only go to the donor and or spouse.
• All income is taxed as ordinary income to the donor.
• At least 5% of the basis must go to a charitable organization annually.
• The maximum QCD is $50,000 per year per IRA owner.

QCDs: An opportunity for philanthropy

QCDs present a philanthropic opportunity to use one’s RMD to do good for others. QCDs can be part of an estate plan that supports social causes while creating a legacy in the retirement phase of life.

Since individual situations may differ, those approaching RMD age must consult their financial and tax professionals to understand the implications and tax benefits of using a QCD strategy. These professionals may provide QCD and RMD guidance based on your financial circumstances and retirement goals, helping you work towards appropriate use of this tax-advantaged strategy.

Sources:

https://www.investopedia.com/qualified-charitable-distribution-qcd-5409491

https://www.forbes.com/sites/leonlabrecque/2023/03/30/secure-20s-new-rule-on-iras-and-charity-can-really-pay-off/?sh=1cd41587278d

https://www.irs.gov/newsroom/reminder-to-ira-owners-age-70-and-a-half-or-over-qualified-charitable-distributions-are-great-options-for-making-tax-free-gifts-to-charity

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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Keri Pugh

Keri Pugh is a Wealth Advisor with Fusion Financial Group, an independent financial planning firm and fiduciary based in Denver, CO. Keri has over 20 years of experience in the industry, as both a financial advisor and Principal. She obtained a bachelor’s degree in Finance from the University of Northern Colorado and is an alumna with national sorority Delta Zeta. Keri holds a variety professional licenses, carries the esteemed mark of Certified Financial Planner (CFP®), meeting rigorous education and experience requirements in key areas of financial planning, as well as the designation of Accredited Investment Fiduciary (AIF®), a symbol of her dedication to upholding the fiduciary standard for clients. As a wife and mother to two young children, Keri is particularly drawn to working with thriving families and women. This is not only reflected within her practice but also in her regular sponsorship of the local PTA and volunteer work with the elementary school. Outside of the office, Keri enjoys traveling, skiing, and the Colorado great outdoors with her family. She often lines up movie marathons for the family and, in line with many clients, is a beginner golfer and a wine enthusiast. To learn more about Keri, connect with her on LinkedIn.