What You Need to Know
- QCDs can be a tax-efficient way for eligible clients to make charitable contributions.
- QCDs can help reduce future RMDs.
- These distributions can help retirees manage their AGI levels each year.
Qualified charitable distributions (QCDs) allow those who are 70 ½ or older to divert some or all of their distributions from a traditional IRA to a qualified charitable organization. As we approach the end of the year, many of your clients are focusing on making gifts to charities. A QCD can make sense for many of those clients who are eligible to use this technique.
What is a Qualified Charitable Distribution and How Does It Work?
QCDs were enacted as a temporary provision in 2006 and made permanent in 2015. A QCD allows those who are at least age 70 ½ to take up to $100,000 of their distributions from a traditional IRA each year and divert those withdrawals to a qualified charitable organization. The amount of the QCD is not subject to income taxes, though there is no charitable deduction available for them.
The amount of the QCD can exceed a taxpayer’s RMD amount for the year. The age to be able to commence QCDs was left at 70 ½ even after the beginning RMD age was increased to 72 under the Setting Every Community Up for Retirement Enhancement (Secure) Act beginning in 2020.
When Does a QCD Need to Be Completed for 2021?
In order to benefit from a QCD in 2021, the withdrawal from your client’s traditional IRA needs to be completed no later than Dec. 31, 2021.
What Your Peers Are Reading
Here are four reasons for your clients to consider a QCD as part of their charitable giving and RMD strategies in 2021 and subsequent years.
1. QCDs are a tax-efficient way to make charitable contributions.
For clients who are charitably inclined and who don’t need some or all of the money from their RMDs, a QCD is a tax-efficient way to make charitable contributions. While there are no charitable deductions available for the QCD, the amount distributed as a QCD is not subject to taxes.
For clients who are not in a position to make charitable contributions with cash or appreciated securities in a taxable account at a level that will provide them with the ability to itemize charitable deductions, a QCD is their best alternative to make a charitable contribution in a tax-efficient fashion.
For many clients, not having this amount reflected as a part of their taxable income for the year can be a huge planning opportunity.