IRAs, RMDs and Charitable Giving

Published On: October 3, 2019

Written by: Ben Atwater and Matt Malick

A qualified charitable distribution (QCD) allows individuals age 70½ years or older to donate up to $100,000 per year to one or more charities directly from their IRAs instead of taking their required minimum distributions. Such a strategy may keep donors in a lower income tax bracket and takes tax advantage of a charitable contribution even if the client no longer itemizes their deductions under new tax laws. 
 
Current law requires clients with Individual Retirement Accounts (IRAs) to take RMDs each year beginning at age 70½, even if they don’t want the funds. This required minimum distribution increases the IRA holder’s total taxable income as the IRS considers RMDs to be ordinary income. 
 
The RMD income could potentially push the taxpayer into a higher income tax bracket. It can also trigger income phaseouts, which limit or eliminate some tax deductions, such as the personal exemption and itemized deductions, and sometimes can trigger higher taxes on Social Security income.
 
Enter QCDs (aka IRA charitable distributions or IRA charitable rollovers), which enable individuals to fulfill their required minimum distribution by a direct transfer of up to $100,000 to charity. For married couples, each spouse can make QCDs, from their respective IRAs, up to the $100,000 limit for a potential total of $200,000.
 
The $100,000 per person limit applies to the sum of all QCDs taken from all IRAs in a year. A donor can make one large contribution or several smaller contributions over the course of the calendar year.
 
A QCD may be a suitable giving strategy for donors who:

• must take a minimum distribution from an IRA, but don’t need the funds and would face increased tax liabilities if they took the distribution as income.
• would like to reduce the balance in an IRA to lower future required minimum distributions.
• would like to make a larger charitable gift than they could if they simply donated cash or other assets. For taxpayers who itemize, the value of charitable gifts they can deduct usually ranges from 20 to 60 percent of the donor’s adjusted gross income. This AGI-based limit does not apply to QCDs. 

 
Qualified charitable distributions are made directly to the eligible charity from a traditional IRA, inherited IRA, inactive Simplified Employee Pension (SEP) plan or inactive Savings Incentive Match Plan for Employees (SIMPLE) IRAs. 
 
The gift must be a direct transfer from the custodian to the charity that never passes through the IRA holder’s hands. For a QCD to count toward your required minimum distribution, it must be made by the same deadline as a normal distribution, which is usually Dec. 31. 
 
Donors can only make qualified charitable distributions to certain qualified charitable organizations, as defined in the tax code. Donors cannot make QCDs to donor-advised fund sponsors, private foundations and supporting organizations, even though the IRS does categorize them as charities.  Donors should check before making a gift to ensure the organization is qualified to accept QCDs.
 
Interestingly, a donor can make a qualified charitable distribution that exceeds the individual’s required minimum distribution for a given year; however, the donor can’t use the extra distribution to meet the required minimum distributions for future years. Additionally, donors cannot receive any benefit for making a qualified distribution to a charity. So, for example, a donor cannot use a QCD to purchase something in a charity auction or purchase tickets for a charity golf tournament.
 
Finally, although the law permits QCDs there is no formal tax reporting mechanism for them.  In other words, your IRA custodian will issue you a 1099-R exactly as if you kept the distribution.  When completing your taxes, you must indicate the distribution to match your 1099 and then indicate that it’s not taxable.  The IRS, however, has no method of automatically confirming this.  Therefore, it’s likely that the IRS will ultimately issue you a notice and you’ll have to respond with an acknowledgement letter from the charity that you made the contribution.  Although this sounds like an enormous hassle, it has become commonplace and should be relatively painless.