A Qualified Charitable Distribution (QCD) is a charitable donation from an Individual Retirement Account (IRA). QCDs are limited to $100,000 in 2023 and can only be made from IRAs with an owner at least 70½ years old. QCDs are not allowed from qualified retirement plans or from ongoing SEP IRAs or ongoing SIMPLE IRAs. SEP and SIMPLE IRAs are treated as “ongoing” if it is maintained under an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made. Under the SECURE Act 2.0, the annual limit for QCDs of $100,000 will be indexed for inflation, beginning in 2024.

A QCD is a helpful tax-planning tool for those charitably inclined. By donating all or a portion of your Required Minimum Distribution (RMD) directly to a charity, the distribution is not included in your income and is not part of your Adjusted Gross Income (AGI), but does satisfy your RMD requirement for the year. For example, if your RMD for 2023 is $60,000, and you make a $60,000 Qualified Charitable Distribution, none of the distribution will be taxable income to you but your RMD will be satisfied for the year. If instead of a $60,000 QCD, you made a $40,000 QCD and took the remainder of your RMD as a normal distribution, you would pay income tax on the $20,000 of the RMD that was distributed to you.

Historically, QCDs had to be made directly to qualified charities. However, the passing of the SECURE Act 2.0 has enabled a donor to transfer a QCD of up to $50,000 from an IRA to a “split-interest entity” that will pay a fixed percentage (5% minimum) for life to the donor and/or the donor’s spouse. A split-interest entity may be a charitable remainder annuity trust or a charitable gift annuity. Income payments to the donor or the donor’s spouse are recognized as ordinary income.

IRA distributions follow a first dollar out rule. This means that if you take a distribution from your IRA in excess of the RMD amount for the year, only the first dollars up to the RMD are considered as satisfying the RMD. Because of this rule, it is a good practice to make a Qualified Charitable Distribution prior to taking the remainder of your RMD if you intend on taking any excess distribution.

Since the Qualified Charitable Distribution is not included in income and is not part of AGI, a QCD is considered an “above the line” deduction. Reducing a taxpayer’s AGI is important as AGI is used to calculate various things, such as Medicare premiums.

The Tax Cuts and Jobs Act of 2017 doubled the standard deduction, which means fewer individuals are itemizing their deductions. By donating to charities through a QCD, taxpayers have an opportunity to fulfill their charitable goals while maximizing their tax savings.

Editors’ note: This article was originally published in August of 2019. It has been updated to reflect 2023 information.

Important Disclosure Information: The information contained within this blog is for informational purposes only and is not intended to provide specific advice or recommendations. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Schultz Financial Group Incorporated), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Schultz Financial Group Incorporated. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Schultz Financial Group Incorporated is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Schultz Financial Group Incorporated’s current written disclosure statement discussing our advisory services and fees is available for review upon request. Please Note: Schultz Financial Group Incorporated does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Schultz Financial Group Incorporated’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.