Broker Check


August 29, 2022

As summer comes to a close and we head into fall, it is time to start thinking about your year-end tax and charitable planning. If making regular charitable contributions is important to you, a qualified charitable distribution (QCD) from your IRA may be a suitable tax-relief strategy.

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 increased the Required Minimum Distribution (RMD) age from age 70 ½ to age 72.  Based on a combination of your year-end account balance and your age-based table, your RMD is calculated annually on December 31st, determining the amount to be taken out by the end of the following year.

For anyone turning age 72, a special rule exists for your first RMD only, allowing you to defer the distribution until the following April 1st, if you chose to.  However, if you defer your first RMD, you will need to make two distributions in the following year.  As an example, Harry turns 72 on March 1, 2022. He may elect to take his RMD in 2022, but must be taken by April 1, 2023.  Harry will be required to take his 2023 RMD by December 31, 2023.  Therefore, by delaying the first RMD, Harry will need to include his 2022 and 2023 RMD on his 2023 tax return.     

As part of your philanthropic planning, the Consolidation Appropriations Act of 2016 permanently enacted the rule allowing for a qualified charitable distribution (QCD) to be made from an IRA.  For anyone over the age of 70 ½ (the original RMD age), up to $100,000 per year can be donated to a qualified charity and can be used to satisfy your RMD.  But now that the RMD age increased to age 72, do I have to wait to make my charitable contributions?  Don’t worry!  The age increase did not impact the QCD, you can still begin making those distributions at age 70 ½.  If Harry has a 2022 RMD of $130,000, he can make a $100,000 gift directly to charity and then take the remaining $30,000 as either cash or tax withholding; the $30,000 will be the only amount included in his taxable income for 2022.     

There are some important considerations when making a qualified charitable distribution: 

  • You must be at least 70 ½ when the distribution is made from your IRA.  If you turn 70 in January, you must wait until at least July to make the distribution. 
  • You and your spouse can contribute up to $100,000 each per year to a qualified charitable organization. The distribution must go directly to the charity(s) of your choice to qualify.   If you receive the funds first and then contribute, this does not qualify under the QCD rules and the full amount will be included in your gross income.  
  • The contribution to charity will then be included as part of your itemized deductions (if you itemize). 
  • Your QCD may be taken from a traditional IRA or a rollover IRA, it is also eligible from an inactive SEP IRA or inactive Simple IRA.  A QCD is not eligible to come from your 401k, 403b, 457 plan, active SEP IRA or active Simple IRA.
  • A beneficiary IRA is eligible to make a QCD, but the beneficiary must have reached the age of 70 ½.
  • Your IRA year end 1099 may not distinguish between taxable distributions and any QCD distributions.  Make sure to keep your records and provide any QCD information to your accountant when completing your taxes.
  • Any distributions to a charity under QCD rules may not have an associated benefit to the donor.  For example,the funds cannot be used to pay for a charity auction item.

This charitable distribution satisfies the IRS RMD rules. AND, because the money went to a charity, you’re not required to report the income or pay taxes on the distribution. The QCD rule permits you to deduct the donation, which lowers your adjustable gross income (AGI).

Since the IRS uses AGI in several calculations -- including the taxable portion of your Social Security benefits, your tax bracket, your Medicare expenses and what deductions and credits you qualify to receive -- you can minimize the impact on your other retirement benefits. Particularly if you regularly support charities, you may find the QCD rule is truly a win-win.

It is an important planning component to understand the options available and guidelines when taking retirement account distributions.  It is our pleasure to touch base to review your charitable desires, cash flow needs and tax efficient planning.  If you’d like further information or have questions, give our office a call.  Happy Fall!