QCDs: A Great Way to Give Yourself (and the Charities You Love) a Gift This Year

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If you’re 72 or older and have a traditional IRA, you probably know the drill: Every year, you must withdraw a minimum dollar amount from your retirement account. These required minimum distributions, or RMDs, were waived for 2020 due to the coronavirus pandemic, but they’re back for 2021. The amount of your RMD depends on several factors, including your age, life expectancy and account balance, and will vary each year. The withdrawal percentage generally starts around 4% of your account balance and can be as high as 53%. Failing to withdraw your RMD by the applicable deadline can result in a steep penalty: 50% of the amount you neglected to withdraw.

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The tax hit from taking your RMDs can come as an unpleasant surprise if you don’t properly prepare for it. When you withdraw money from your IRA — including withdrawals to fulfill RMD requirements — it’s considered taxable income and taxed according to your income bracket. In 2021, that can be as high as 37% for some individuals. And in some cases, your RMD could raise you into a higher income tax bracket.

What if you don’t need the money you’re essentially forced to withdraw? Can you fulfill your RMD obligations while avoiding the corresponding income tax? This is where qualified charitable distributions can be a smart option.

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The benefits of Qualified Charitable Distributions

A qualified charitable distribution, or QCD, is a donation you make directly from your IRA to a qualified public charity that otherwise would be a taxable distribution. QCDs are a savvy strategy to have in your tax-planning toolkit — and they let you make an impact by supporting the causes that mean the most to you.

Here are three reasons you may want to consider making a QCD this year:

1. QCDs allow you to fulfill your RMD without increasing your taxable income.

You can give up to $100,000 in QCDs each tax year, and you’re able to “count” this amount toward satisfying your RMD. In some instances, you may be able to fulfill your entire RMD by making a QCD. And you can make QCDs to as many qualified charities as you wish, up to the $100,000 limit.

Since a QCD is distributed directly from your IRA to the charity, you don’t have to pay income tax on it like you would if you took the distribution for yourself. This makes QCDs a smart option for retirees who don’t need the additional money from their IRA — they can respect the RMD mandate without having that distribution included in their yearly income.

2. You don’t have to itemize deductions to enjoy the tax benefits of a QCD.

The Tax Cuts and Jobs Act of 2017 increased the standard deduction, so more Americans choose not to itemize deductions when they file their taxes. With QCDs, you don’t take a deduction like you do with other charitable donations. Instead, the amount of your QCD is excluded from your gross income. Making a QCD is a smart way for individuals who don’t itemize deductions to still receive tax benefits from their charitable donations.

3. QCDs maximize the impact you make on charitable causes.

As we age, many of us are thinking about the legacy we want to leave behind and how we’ll be remembered after we’re gone. QCDs can be a smart way to serve the causes closest to your heart. The tax savings they offer let you maximize your charitable impact.

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Here’s an example of how making a QCD could work for you and the charities you care about. Let’s say your IRA balance was $500,000 at the end of the previous year, and that your RMD for this year is 3.9% (approximately $19,500). Even if you don’t need the funds, you’re required to withdraw this amount from your IRA by the end of the year.

If you withdraw that money for yourself, it’s included in your taxable income, meaning you’ll have to pay income tax on it. But let’s say instead of taking that $19,500 distribution, you decide to make a QCD of that amount from your IRA directly. By doing this, you fulfill your RMD for the year, plus you don’t have to add to your taxable income (or run the risk of sliding into a higher tax bracket). Not to mention, your donation is put to work for a charitable cause that matters to you. With a QCD, everyone wins.

How to make a QCD

If you want to make a QCD, you must complete your donation by Dec. 31, 2021, if you want it to apply to your RMD for the 2021 tax year. It’s important to make these distributions as soon as possible, because charities and custodians are often very busy in mid- to late December processing end-of-year donations.

To make a QCD, you’ll have to fill out an IRA Charitable Distribution Form. In it, you’ll include your account information and the nonprofit’s taxpayer identification number, and submit it to your IRA custodian. Your custodian may require you to have the form signed in the presence of a notary public, so read the form carefully to avoid any last-minute obstacles. You should also notify the charity of your gift, so they can anticipate the donation and be prepared to send you a donation receipt or other written acknowledgment of your contribution.

Some charities also offer online tools to streamline the QCD donation process for donors. You can check the donation page on the website of any charity you’d like to support to see if they offer this service.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Allison L. Lee is the Attorney-at-Law, Director Trusts & Estate Content for FreeWill, a mission-based public benefit corporation that partners with nonprofits to provide a simple, intuitive and efficient online self-help platform to create wills and other estate planning documents free of cost. Through its work democratizing access to these tools, FreeWill has helped raise billions for charity. Prior to joining FreeWill, Allison spent more than a decade in private practice.