Qualified Charitable DistributionsSubmitted by Financial Planning Solutions, LLC on December 6th, 2018
Qualified Charitable Distributions. The law that allows one to make a contribution to a charity from their IRA if they are over 70 ½ has been around awhile. It was one of those laws that would lapse and then get reinstated. With the passing of the PATH Act of 2015, it is now permanent.
Okay, so how do these things work and why should you consider using one?
First, some facts as these can be complex and I've heard some misconceptions surrounding them.
- One must be over 70 ½ and own an IRA or a SEP IRA or SIMPLE IRA (if contributions from any source are no longer being deposited). One misconception is one merely has to turn 70 ½ by the end of the year however, one must have already turned 70 ½ before they donate this money.
- You can donate up to $100,000 each year even if your Required Minimum Distribution (RMD) is less. "Mary's" Required Minimum Distribution is $47,000. Mary can contribute up to $100,000 to the charity or charities of her choice and pay no taxes. "Stan's" Required Minimum Distribution is $123,000. He can only donate $100,000 and the remainder of the $23,000 must be taken as a taxable distribution otherwise a 50% penalty would be owed on the 23k. By the way, a married couple can each use up to the $100,000 limit and give that to a charity, assuming the both meet the requirements stated above. Bear in mind, the 100k limit per person is for all IRA's combined that an individual may have.
- One must send this donation directly to the charity. You cannot take possession of a check and then send that to the charity. The charity must receive this donation by 12/31 by the custodian that holds the IRA. Therefore, this process should be started well ahead of the 12/31 deadline as glitches can happen slowing things down.
So why would one do this? First, one should be charitably inclined. If you don't have the desire to give to a charity, this probably isn't for you.
When one turns 70 ½, the law requires they take a Required Minimum Distribution (RMD) from their IRA. This distribution is taxed as ordinary income. When one utilizes a QCD, the money goes directly to the charity and therefore, no tax is due.
This works best the larger one's Required Minimum Distribution (RMD) is. If one for example, had a RMD of $90,000 and had other taxable income of $100,000, they could be looking at a tax bill on the combined amount of $190,000. By doing the QCD, they would only have taxable income on the $100,000.
These can be tricky and must be done right and they are not right for everyone. Many people for instance need these distributions to provide income to pay bills. Others may have taxable accounts where it may make more sense tax-wise to donate appreciated securities.
Before making any decisions, give us a call. We are here to help.
All the best.
Rick Fingerman, CFP®, CDFA®, CCPS®
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