A client asked a great question this week about an often-overlooked strategy to utilize tax-deferred IRA funds to make donations directly to charity. Let’s take a closer look at this strategy and determine when it may make sense for you to consider it as well.

What is a Qualified Charitable Distribution (QCD)?

A QCD is a charitable donation made directly for a traditional IRA account to a charitable organization. Since the funds go directly to charity, the distribution is not included in your taxable income (as other distributions from traditional IRAs would be). You are also not able to claim the charitable deduction on your return (since you didn’t pay tax on the related distribution)

Are there limitations?

Yes. QCDs can only be made once the IRA account holder is at least 70.5 years of age and there is an annual limitation (currently $105,000 per year). The distributions must be made directly to a qualified charitable organization. Lastly, QCDs can only be made from IRAs (not from other tax deferred accounts like 401ks)

What’s the benefit?

The benefit will vary by individual and their tax situation and strategy.

One advantage of QCDs is that the amount counts towards your required minimum distribution. If you aren’t in need of the cash from your RMD (and would like to reduce your taxes), a QCD can be a great approach to meet the distribution requirement.

It’s also a smart tax approach if you do not itemize. Under today’s tax code, many individuals take the standard deduction (due to the cap on state and local tax). As a result, if you aren’t itemizing, you wouldn’t get “credit” for many a charitable donation in cash. However, by making your gifts via a QCD, you lower your income tax by not having the distribution included in your income (as it would be if you chose to make the gift in cash post IRA distribution)

QCDs also allow you to manage your level taxable income – which impacts many items in retirement such a Medicare Part B premiums – by not having to include the distribution you’d use to gift cash to a charity as income on your tax return.

What approach is right for me?

If you are 70.5 years old, or approaching that age, it’s worth keeping this strategy in mind each tax year before you process your RMD or make large charitable donations. There are other strategies when it comes to charitable gifting (such as donor advised funds, gifting of appreciated stock, etc) that are worth considering along with QCDs. Ensure that you consider all your options and find the one best suited to your individual circumstance.