Advice
Whether you are preparing to take your required minimum distribution (RMD) from a retirement account this year or are looking for ways to make the most of your charitable donations, you may be wondering whether a Qualified Charity Distribution (QCD) is a good use of your funds. For many, making a QCD before December 31, of each year, might be a way to support charitable causes while satisfying your RMD for the year, up to $100,000. Here are some factors to consider when deciding whether to make a QCD this year.
What is a QCD?
A QCD allows individual retirement account (IRA) holders to make a direct IRA distribution to an eligible charity, which generally means a 501(c)(3) (charitable organization). You may contribute to multiple charities by making a separate QCD for each one.
When Does a QCD Make Sense?
Although you may donate to charity at any age, QCDs are limited to those eligible for RMDs—which, in 2023, is limited to those aged 73 and older. Previously, failing to take an RMD came with a significant excise tax hit of 50%, however, the Secure 2.0 Act dropped this tax to 25%. Taking an RMD that you do not need may significantly increase your taxable income and potentially put you in the top marginal tax rate. Transferring your RMD funds to a charity may eliminate any tax liability associated with these funds.
Generally, a QCD makes sense for those who either do not need their RMD or are trying to keep their taxable income low for other reasons, such as qualifying for certain benefits, estate planning, or sending a child to college.
What is the Deadline for Making a QCD for 2023?
Report QCDs on your income tax return. Because RMDs are subject to a year-end deadline, the deadline for making a 2023 QCD using 2023 RMD funds is December 31, of each year.
If you make a QCD in 2023, you should report it on your April 2024 Form 1040 income tax return using the amount in Box 1 on Form 1099-R. Report the full amount of the charitable distribution(s) on the line for IRA distributions. Next to the IRA distribution, you should enter $0 for the taxable amount if the entire distribution was a QCD and enter “QCD” in the space next to the line.
If only part of your IRA distribution was a QCD, you should enter the total taxable amount of the distribution minus QCD and then enter QCD in the space next to the distribution line.
For more information on retirement accounts, contact Billie Treber by calling 574-246-4869 or send an email to [email protected]
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This material was created for educational and informational purposes only and is not intended to provide specific investment advice or recommendations for any individual. If you are seeking investment advice specific to your needs, consult your financial professional.
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Sources:
Retirement Plans FAQs regarding IRAs Distributions Withdrawals | Internal Revenue Service (irs.gov)
How to Reduce Your Taxes and AGI by Giving to Charity (investopedia.com)
Qualified Charitable Distributions – Fidelity
Exemption Requirements – 501(c)(3) Organizations | Internal Revenue Service (irs.gov)