Being generous with your money is one of the great joys in life for many of us. And it turns out that being generous with our IRAs can be both personally satisfying and provide tax benefits.
This is even more important due to recent changes in federal tax law.
Many of us spend years contributing to retirement accounts without thinking too much about the details of what happens when it’s time for the money to come out. And some people even find they don’t end up needing the money as much as they thought they would. And they can be in a fix when it comes to taxes.
Eventually we have to pay taxes on the money that accumulates in our IRAs. If you’re fortunate enough that you don’t need all of that money, it’s good to have a plan.
Here’s an idea.
When you reach the age where annual withdrawals are mandatory – referring to your required minimum distribution, or RMD — you can reduce the impact on your taxes and also help worthwhile causes and organizations through a qualified charitable distribution, or QCD.
Best of all, QCDs can be made to almost any 501(c)(3) organization or house of worship, including the Delaware Community Foundation. IRS regulations permit QCDs into most types of nonprofit organizations – from programs serving children, to arts programs, environmental programs, senior centers, and so many more.
At the community foundation, while QCDs cannot be contributed to donor advised funds, they can go into designated funds, which provide grants to specific charitable organizations; field of interest funds, which allow a donor to support a specific passion or interest; scholarship funds; or to the DCF’s Delaware Forever Fund, which was developed to address some of the community’s most pressing needs as they arise.
Changes in the tax law this year could make a QCD even more useful than before. In the past, many people opted to itemize their deductions to get a greater tax benefit over the standard deduction. Itemizing in this scenario allowed charitable deductions to provide an additional financial benefit for taxpayers.
But this year with the higher standard deduction, fewer people are expected to itemize, meaning those donations to charity won’t reduce your tax bill. Using the QCD as a strategy may allow you to take the higher standard deduction while also reducing your taxable income.
How it works
Everyone must take annual withdrawals from their tax-deferred retirement accounts once they reach 70½. (Note: An after-tax account, like a Roth IRA, does not require a minimum distribution.)
These required minimum distributions – based on your account balance and your age – count as income and are reported on your Form 1040 to the IRS. Just leaving the money in the retirement account isn’t a good option. If you don’t withdraw it, there’s a penalty equal to 50 percent of the amount that should have been withdrawn.
A QCD allows you to transfer up to $100,000 directly from your IRA to a qualified charity without having to pay income tax on the donation. If you’re married and filing jointly, your spouse also can directly donate up to $100,000 of their retirement account. Although people in any tax bracket can benefit from making a charitable contribution from an IRA, those in the higher tax brackets get the biggest bang for their buck. However, even a $1,000 donation through a QCD could save $250 in federal taxes.
Since most people are expected to take the standard deduction this year, a QCD directly to a charity – such as the Delaware Community Foundation or one of its funds – is the only way to see a benefit from a donation. For this to happen, the funds must be donated directly to the charity from the custodian of the IRA. Otherwise the donation will still count toward your gross income.
While a QCD is a great way to reduce the taxable amount of your IRA distribution, there are a few caveats. Only IRAs are eligible for a QCD. This includes traditional, rollover, inherited and inactive SEP and SIMPLE plans. Occasionally, a QCD can be made from a Roth IRA, but those funds are after-tax so the benefits aren’t the same.
Make sure the recipient of your donation is a qualifying charity. We can help you with that. To meet the requirements, the donation must be made to a 501(c)(3) organization or house of worship. It does not include private foundations, donor advised funds, or supporting organizations. At the DCF, only a donor advised fund is excluded from receiving a QCD.
Donations through a QCD must be made by the end of the year in order to exclude that amount from your taxable income. In doing so, you may have to make some adjustments to the timing and delivery of your distributions.
You also will have to let your tax preparer know to note the QCD on your 1099-R form, as IRA custodians don’t have to identify it. If you don’t, then the withdrawal will be fully taxable, eliminating the tax benefits of the donation.
Lastly, you can’t double dip on the donation. If you donate through a QCD, you don’t get to claim an itemized charitable contribution tax deduction as well.
As with any major financial decision, talk to your advisor about how a QCD will affect your individual tax situation. The DCF is happy to work with you and your financial advisor together to ensure that you receive the greatest tax advantages while making the maximum impact on the charitable causes you care about.
Generosity is good for us. This vehicle allows some of us to give even more.
Stuart Comstock-Gay is president and CEO of the Delaware Community Foundation. Contact him at firstname.lastname@example.org.
To discuss whether a QCD might be a good option for you, contact Joan Hoge-North, 302.504.5224.