What is a Qualified Charitable Distribution (QCD)?
The IRS requires clients age 73 or older to take required minimum distributions (RMDs) from their Individual Retirement Accounts (IRAs) each year or be subject to a 25 percent excise tax penalty.
RMDs increase your client’s adjusted gross income (AGI) and could push your client into a higher tax bracket, negatively impacting Social Security, Medicare benefits and other tax credits and deductions.
To offset RMD income taxes and increase cash donations for charity, taxpayers over age 70 ½ can donate up to $105,000 directly from a taxable IRA to a 501(c)(3) charity instead of taking that amount as RMD income.
This donation is known as a QCD.
Is a QCD Right for Your Clients?
QCDs may be suitable giving strategies for your clients who:
- Are required to take an RMD from an IRA, but don’t need the funds
- Are charitably-minded
- Have fewer itemized deductions, including their potential IRA RMD gift, than the standard deduction, so that they wouldn’t be able to deduct the RMD gift
- Would like to reduce the balance in an IRA to lower future RMDs
- Would like to make a larger tax-deductible charitable gift than they could if they simply donated cash or other assets
First-Dollar-Out Rule
Although it is typical for advisors to wait until the fourth quarter to have charitable conversations with clients, we recommend starting QCD conversations as early as possible each year to avoid RMD income for QCD-eligible clients.
Known as the “first-dollar-out rule”, the IRS requires that the first dollars withdrawn from an IRA in a year where an RMD is due will first go to satisfy the RMD. If the RMD is taken before the QCD, that RMD income can’t be offset by a QCD done later in the year.
QCD Illustration
Alex, a single tax-filer with an anticipated ordinary income of $100,000 in 2021, is 73 years old and takes a distribution from his traditional IRA.
Alex’s IRA is valued at $1,000,000, resulting in a projected RMD of $40,485 ($1,000,000 divided by the IRS-mandated age 73 distribution period amount of 24.7).
The below illustration compares a cash gift of $40,485 to a QCD gift of $40,485.
| Illustration | Cash Gift | QCD Gift |
|---|---|---|
| Adjusted Gross Income (AGI) | $140,485 (Includes RMD) |
$100,000 |
| Donation to Qualified Charity | $40,485 | $40,485 |
| Itemized or Standard Deduction | $40,485 Itemized Deduction (Assumes gift is only itemized deduction) |
$14,250 Standard Deduction (Assumes 2021 standard deduction amounts of $12,550 plus $1,700 for age 65 or older) |
| Estimated Federal Taxable Income | $100,000 | $85,750 |
| Estimated Federal Income Taxes Owed (based on 2021 tax rate/brackets and standard deduction) |
$17,835 (Excludes other federal and state income taxes) |
$14,482 (Excludes other federal and state income taxes) |
| Estimated Tax Savings | $3,353 |
Gifting QCDs
Although QCDs cannot be gifted to donor-advised funds, they can be gifted to designated funds and field-of-interest funds held at San Diego Foundation. Additionally, we offer donors an opportunity to make a QCD that supports their charitable interests through one of our strategic initiatives:
Your QCD Partner
At SDF, we guide you and your clients through the QCD giving process in four easy steps:
- Choosing a gift amount
- Choosing which community need or cause aligns best with your client’s giving interest(s)
- Working with your client’s plan administrator to complete the IRA Letter of Intent and IRA Distribution Request forms
- Making the gift by check, wire transfer or security to a qualified SDF initiative.
Interested in learning more about QCDs? Contact us today.
Jason Rogers, AIF, CWS
Director, Wealth Advisor Relations
jrogers@sdfoundation.org
(858) 245-1508