A Qualified Charitable Distribution (QCD) is a nontaxable donation made directly from an Individual Retirement Account (IRA) to an IRS qualified charitable organization, or 501(c)3, buy an eligible donor aged 70 1/2 or above.
QCD's can not be made from a SEP or SIMPLE IRA.
The timing is key here because the ability to make the QCD coincides with the timing of Required Minimum Distributions (RMD) from the IRA. RMDs, if not taken properly on an annual basis beginning at 70 1/2, QCD's can create very significant tax penalties.
A QCD, conveniently, can be made in amounts up to $100,000 per year, and the amounts distributed directly from the IRS custodian to the qualified charity can then be counted toward the client's RMD for that year. If may simply be a portion of the RMD, with the remainder of the RMD going to the donor as taxable income. If an amount donated in a QCD is higher than the RMD, it can not be applied directly to an RMD on a go forward basis, but by lowering the overall account value of the IRA, it will impact future RMDs.
Overall, a QCD will:
- Allow the client's RMD to be satisfied, in whole or in part
- Reallocate unwanted taxable income
- Not affect Social Security benefits
- Reduce potential exposure to Medicare surtax
All the while, a worthwhile charity will have received a nice donation.