A strategy of qualified charitable distributions (QCD) can help individuals minimize taxes on their retirement account withdrawals and pay fewer taxes over their lifetime. By following the rules of a QCD, individuals can donate money from their IRA directly to a qualified nonprofit without it being counted as income, helping them donate the total amount withdrawn from their IRA. This strategy can be implemented starting at age 70.5 and can count as part of the required minimum distribution each year.
The QCD strategy was made permanent by Congress in 2015 and is unlikely to be repealed despite current gridlock in Congress. To utilize the QCD strategy, individuals must choose a qualifying nonprofit, inform their IRA custodians of their intention, and have the custodian send a check directly to the charity. This strategy helps reduce Adjusted Gross Income (AGI), providing additional tax savings and benefits. Additionally, all assets within an IRA are eligible for QCD distribution, with a cap set at $100,000 annually.
The tax advantages of QCDs come from reducing AGI without the need to itemize deductions, as qualified charitable contributions up to 100% of AGI are deductible for individual taxpayers. This reduction in AGI can help individuals stay in lower tax brackets, reduce or eliminate taxes on Social Security benefits or other income, and maintain eligibility for deductions and credits. The age requirement for taking Required Minimum Distributions (RMDs) was recently raised to 73 from 72, applying to traditional IRAs, 401(k) accounts, and SEP-IRAs, with no RMDs being required for Roth IRAs.
Ultimately, the decision to use the QCD strategy will depend on individual circumstances, but it is beneficial for those who do not need the RMD money immediately, want to minimize future RMD amounts, or plan to make charitable donations. Individuals with highly appreciated stocks not held in a retirement account may benefit more from donating stocks directly to a charity to avoid paying capital gains taxes. Making a QCD from an IRA is possible once individuals reach age 70.5, allowing for tax savings that can increase charitable donations or provide extra retirement income.
