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Navigating QCDs in 5 Easy Steps Thumbnail

Navigating QCDs in 5 Easy Steps

What is a qualified charitable distribution (QCD)?

A QCD is a distribution from an IRA that goes directly to a qualifying charity and is not included in the taxable income of the IRA owner. A QCD cannot be made from an employer plan. A QCD can be up to $100,000 a year, per individual.

QCDs can be overwhelming, but with these 5 easy steps, you can become more knowledgeable and act with more confidence when dealing with your finances.

1. Either an IRA owner or a beneficiary can do a QCD. The individual must be at least age 70½ at the time of the transaction. Reaching age 70½ later in the year is not enough. Both spouses can do a QCD when each spouse does the QCD from their own IRA.

2. A QCD can be made from an IRA, an inactive SEP or SIMPLE IRA, or a Roth IRA. Only pretax amounts can be used for a QCD, which makes the use of Roth funds very unlikely. The QCD must be a direct transfer to a qualifying charity. A check payable to the charity but sent to the IRA owner will qualify as a QCD, as will a check written from a “checkbook IRA” to a qualifying charity. If an IRA owner receives a check payable to him from his IRA and then later gives those funds to charity, that is not considered a QCD.

3. A charity must be a qualifying charity. It cannot be a donor-advised fund or a private foundation. A gift to a charitable gift annuity will also not qualify. A QCD to a charity where the IRA owner has an outstanding pledge will qualify and will not create a prohibited transaction. The QCD must satisfy all charitable deduction rules. If a distribution to a charity is more than $100,000, the amount over $100,000 is taxable to the IRA owner and is deductible on the owner’s income tax return. The excess amount cannot be carried over to a future tax year.

4. A QCD can satisfy a required minimum distribution (RMD) but can be made before age 72. It is not limited to the amount of the RMD but is capped at $100,000 a year. If an RMD is more than $100,000, any amounts in excess of the QCD are taxable to the IRA owner. QCDs can now be made before the first RMD year (age 72). 5. The IRA custodian has no special tax reporting for a QCD. The QCD will be reported on Form 1099-R as a regular distribution. The IRA owner will need to report the QCD on his tax return. The amount of the QCD is excluded from the owner’s taxable income. The IRA owner also cannot take a charitable deduction for the QCD amount.

By Christian Cordoba
Founder, California Retirement Advisors

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Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.