Giving with Purpose: Maximizing Impact Through Qualified Charitable Distributions

Many citizens find the US tax code to be overwhelmingly complicated. The numerous

rules, regulations, and exceptions make it difficult for the average taxpayer to

understand their obligations. Often, taxpayers are unaware of new rule changes that

may allow them to reduce or eliminate their tax obligations. This is the case with

Qualified Charitable Distributions.

A Qualified Charitable Distribution (QCD) is a financial strategy that allows individuals

aged 70½ or older to contribute directly from their Individual Retirement Accounts

(IRAs) to qualified charities. This method of giving has gained popularity due to its

potential tax advantages, but it also comes with certain disadvantages. In this article, I

have outlined some of the advantages and disadvantages of QCDs.

Advantages of QCDs

1. The most significant advantage of QCDs is the tax benefit they provide. When a

distribution occurs from an IRA, it typically counts as taxable income. However, when an

individual age 70½ makes a withdrawal from their IRA and structures it as a QCD, the

amount donated is excluded from the taxpayer’s taxable income. This means the

individual can lower their overall tax burden for the year.

For individuals aged 70½ who are tithing or giving to one or more charitable

organizations, QCDs make it easier for them to support causes they care about without

the withdrawal creating a negative tax burden against them!

2. For those IRA owners over age 73, the IRS mandates taking Required Minimum

Distributions (RMDs) from your IRAs. QCDs can be used to satisfy these RMDs,

effectively allowing individuals to fulfill this requirement while supporting charitable

organizations. This can be particularly beneficial for those who do not need the extra

income for living expenses.

3. Some benefits we receive in retirement, such as Medicare, are considered “means-

Tested.” A means-tested benefit is determined based on an individual’s adjusted gross

income (AGI). In the case of Medicare, the higher AGI may cause higher Medicare

insurance premiums. Since QCDs can reduce taxable income, they may also help

beneficiaries avoid higher Medicare premiums. Lowering reported income through a

QCD can be a strategic financial move for individuals nearing thresholds that trigger

higher Part B and Part D premiums.

Disadvantages of QCDs

1. While QCDs offer substantial benefits, there is a cap on the amount a taxpayer can

donate through this method. As of recent tax laws, individuals can only donate up to

$100,000 per year from their IRAs as a QCD.

2. Only IRAs are eligible for QCDs, which means funds in other retirement accounts,

like 401(k)s or 403(b)s, cannot be directly utilized unless rolled into an IRA. This

limitation can add complexity for those wishing to use QCDs from various retirement

funds.

3. Not all charities qualify for QCDs. QCDs must be made to 501(c)(3) organizations by

enabling direct donations from the custodian to the charitable organization. Therefore,

individuals must ensure their chosen charities meet the IRS qualifications, potentially

limiting giving options.

In conclusion, Qualified Charitable Distributions offer retirees a unique path to

philanthropy while providing potential tax advantages. However, the lack of

understanding of QCDs necessitates careful consideration and planning to ensure they

align with an individual’s financial objectives.

Michael Wallin, Certified Financial Planner ™. For more information, please see www.panthrex.com.