On December 20, 2019, President Donald Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). Among other issues, this changes the age at which one must begin to take taxable distributions from certain qualified retirement plans an individual retirement accounts (IRAs). For years 2019 and before, those who have attained age 70-1/2 must begin to take Required Minimum Distributions (RMDs). After the year 2019, the SECURE act increases the age at which one must begin to take RMDs from 70-1/2 to 72 years of age. This change does not affect your ability to make Qualified Charitable Distributions (QCDs) once you attain age 70 1/2, but your QCDs will not count toward your RMD until you attain your RMD age.
A QCD lets you send up to $100,000 a year directly from an IRA to a charity once you are required to take RMDs. It is a relatively easy, highly tax-efficient way to support qualified charitable organizations that are important to you.
The salient point of a QCD is that the distribution is not included in your adjusted gross income (AGI), which may have a number of positive financial benefits.
An individual’s charitable contribution can be an itemized deduction, which reduces taxable income. These deductions help reduce taxable income. The money used to fund the contribution is, however, included in your AGI, if it is from a taxable source, such as employment income or distributions from a qualified plan.
Your AGI is the starting point for calculating a number of tax-related items. For example, AGI is used in determining how much of your Social Security benefits are taxed, Roth contribution eligibility, applicability of the net investment income Medicare surtax, your Medicare premium, your state income taxes, and whether your itemized deductions are phased out.
Once you reach age 72, you are required to take annual RMDs, from traditional IRAs and most of your other retirement accounts. Any money you send from the IRA to a qualified charity as a QCD counts toward your traditional IRA’s RMD. If an RMD was taken and then used for philanthropic purposes, the withdrawal would not be counted for income tax purposes but would be included in the AGI.
This makes the QCD particularly useful for charitably inclined people in higher tax brackets who are still working or have other significant pension income and do not need the RMD to fund life expenses.
Effective for QCDs made in a tax year beginning after 2019, the $100,000 QCD limit for that year is reduced, but not below zero, by the aggregate amount of deductions allowed for prior tax years due to the aforementioned SECURE Act change. In other words, deductible IRA contributions made for the year you must begin taking distributions and later years can reduce your annual QCD allowance.
- charitably inclined;
- traditional IRA holder;
- minimum age 70-1/2; and
- financially well-established.
Qualified Charitable Distribution
To use a QCD, ask your traditional IRA custodian to send the money directly to the qualified charity (you cannot receive the money first and then send it to the charity yourself). Qualified charities include all 501(c)(3) organizations. You cannot make a QCD to donor-advised funds, private foundations, supporting organizations, and other grant-making organizations.
QCDs offer several advantages.
- They may provide multiple tax benefits.
- QCDs are not counted toward AGI, which has a number of tax-related benefits.
- They may be used to satisfy RMD requirements without tax ramifications.
- They may be used for multiple charities, up to a total of $100,000 annually.
- Even if you do not itemize deductions, QCDs may provide a tax benefit.
QCDs must meet the following criteria.
- They can be made only from IRAs.
- You must be at least 70-1/2 years old.
- QCDs are limited to $100,000 per taxpayer per year. As noted above, there may be further limitations subsequent to passage of the SECURE Act for deductible IRA contributions made for the year you reach age 70-1/2 and later years.
- Contributions must be transferred directly from the IRA to the charity.
- You may make QCDs only to qualified charities. QCDs cannot be made to donor-advised funds, private foundations, supporting organizations, and other grant-making organizations.
- You must obtain a letter from the charity substantiating the gift and stating that nothing was received in return.
For more information, please contact your PNC advisor.