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Financial Freedom Tips (Video) – Qualified Charitable Distribution

By: Josh Duncan

So what is a Qualified Charitable Distribution exactly?

It’s a great tax benefit for you—and a great benefit for the charities you care about.

If you have a traditional IRA and are at least 70½, you qualify to gift all (or part) of your required minimum distribution (RMD) to the charity of your choice. If you do this correctly, you will pay zero income tax on the amount donated. This is a win-win for both you and your favorite charity!

In this 5-minute video, Josh Duncan explains how QCDs work, including the rules and regulations you need to know, as well as mistakes to avoid.



Full Transcript of video

Hello, I’m Josh Duncan with SCB News bringing you this edition of Financial Freedom. The purpose of Financial Freedom is to provide tips to help you achieve financial freedom for personal significance.

Many people I meet include generosity as something that makes them feel significant. They enjoy giving to their church, local food pantry, shelters, missions, first responders, and much more. Additionally, I have yet to meet a person who enjoys paying taxes. The reality is I enjoy nice roads and knowing a highly qualified professional arrives when I dial 911. But, I do not like the act of paying taxes.

Most of us know that we can deduct charitable contributions to certain types of organizations from our income taxes. There is a way to take this a set further for those individuals who have a Traditional IRA and are at least 70 ½ years old.

What is so special about the age 70 ½? Well, the federal government knows you didn’t pay taxes on that IRA for many years. At 70 ½, they feel they have given you enough time to enjoy a tax vacation and now it’s time to pay up. So, they created the required minimum distribution or RMD to have some of the money removed from your IRA. When money is removed from your IRA, you count it as income and pay taxes. Simple, right?

Suppose you are 70 ½ and are preparing to take your RMD. Let’s say you are required to take $10,000 from your IRA this year. However, you have other retirement income and you do not need this $10,000 to live your current lifestyle and you are a generous person. Here is where you can complete a qualified charitable distribution or QCD. If you are in the 24% tax bracket, this will save you $2,400 in federal income tax.

A qualified charitable distribution is where you make a donation from your IRA to a charity eligible to receive tax-deductible contributions. The money goes from your IRA to the charity and never touches your hands. The portion you give counts toward your RMD and keeps the IRS happy. You also do not have to pay income taxes on the portion you donate! What a great benefit, right? You just gave to your favorite tax-deductible causes, satisfied your RMD, and kept from paying income taxes on your donation.

As with everything we discuss there are rules and limitations. First, as I mentioned earlier, this can only be completed from an IRA. So, if you are still holding on to your 401(k) and you want to take advantage of the qualified charitable distribution, you will need to rollover your 401(k) to an IRA.

Second, there is an annual limit of $100,000 per person that can be donated with the QCD. Therefore, a married couple could make $200,000 of qualified charitable distributions per year. The high limit allows many individuals to take advantage of this benefit. If you donate more than the limit, the overage will count toward your taxable income.

Finally, the donation must be made from your IRA to the charitable organization. Your financial advisor or IRA custodian will be able to walk you through this process. Be warned, if you have the donation amount sent to you from your IRA, so you can hand-deliver the check, you have just made that money taxable. There is no grace from the IRS in this process.

Generosity is very important to many Americans. The qualified charitable distribution is a great way to make a charitable contribution while realizing a tax benefit. Be sure to know and follow the rules set forth by the IRS so your charity and you can reap the benefits.

Thank you for joining me for Financial Freedom. I'm Josh Duncan, Financial Advisor with F5 Financial Planning, helping you achieve financial freedom for personal significance. Please contact me here to send topics you would like me to cover. See you next time.


Photo credit: SCB Video TV Marketing (producers of the video)

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