Qualified Charitable Distributions: A Smart Way to Give Back and Save on Taxes

Qualified Charitable Distributions (QCDs) offer an effective and tax-efficient way to give back to the community while reaping financial benefits. These distributions allow individuals aged 70½ or older to donate directly from their Individual Retirement Accounts (IRAs) to qualified charities, bypassing taxable income and potentially lowering their overall tax liability.

What are Qualified Charitable Distributions?

QCDs are tax-free distributions made directly from a traditional IRA, Roth IRA, or inactive SEP or SIMPLE IRA to a qualified charity. The IRA owner must be at least 70½ years old at the time of the distribution. QCDs offer a way to fulfill one’s Required Minimum Distribution (RMD) while enjoying significant tax benefits. QCDs are limited to $100,000 per individual per year or $200,000 for a married couple if both spouses have separate IRAs.

A Real-World Example: Jane and her $500,000 IRA

Jane, a 72-year-old retiree, has accumulated $500,000 in her traditional IRA. As she has reached the age of 70½, she must take an annual RMD, which is considered taxable income. Jane’s RMD for this year is $20,000. She is in the 24% tax bracket and wants to donate to her favorite charity.

By using a QCD, Jane can donate the $20,000 directly from her IRA to the charity. This will satisfy her RMD requirement for the year and exclude the $20,000 from her taxable income. In turn, this lowers her adjusted gross income (AGI) and reduces her tax liability.

The Tax Savings: Crunching the Numbers

If Jane were to take the $20,000 RMD without using a QCD and donate the funds separately, she would need to include the RMD as taxable income. In the 24% tax bracket, this would result in a $4,800 tax bill on the RMD.

However, with a QCD, Jane can donate the $20,000 directly from her IRA, bypassing her taxable income. By doing this, she saves $4,800 in taxes while still supporting her favorite charity. Moreover, the lower AGI may also reduce her Medicare premiums and potentially minimize the amount of Social Security benefits subject to taxation.

For individuals aged 70½ and older with IRAs, it’s worth considering QCDs as part of their tax and charitable giving strategy. Consult a financial advisor or tax professional to determine if QCDs are an appropriate choice for your specific situation. We would be delighted to visit about how this tax efficient strategy may be an excellent opportunity for you! Give our office a call (409) 234-8546

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