Qualified Charitable Distributions and Your IRA

Qualified charitable distributions (QCDs, to the initiated) are a relatively recent addition to the federal income tax rules. Using them can make a real difference in the income taxes some IRA owners have to pay.

If you are over age 72 (or younger, if you inherited an IRA from someone else) you may know at least a little about required minimum distributions. Every year you must withdraw at least a minimum amount from your IRA. You can withdraw more, of course. But you pay tax on every dollar you withdraw.

There are exceptions and some special rules. If you have a Roth IRA, there are no minimum distribution rules (unless you inherited it). To the extent the IRA contributions were taxed before going in, withdrawals might not trigger taxation. But still, the income tax effect can be pretty overwhelming — particularly to a retiree who doesn’t actually need the minimum distribution to cover living expenses.

Try this illustration:

Imagine, for example, that you had $400,000 in your IRA on December 31 of last year. This year you turn 75. You’ll have to withdraw almost $18,000. If you have plenty of other income, you could be paying as much as about $6,500 of additional tax. And that is on income you didn’t really need at all.

Now imagine that you have a favorite charity, and last year you gave them $20,000. Unfortunately, you couldn’t deduct the contribution last year. Especially with an expanded standard deduction, a lot of taxpayers find that they don’t get any specific income tax benefit from charitable gifts — even large ones.

Eureka! This year you can order your IRA custodian to send your minimum distribution directly to your charity! You don’t get a deduction at all — but you get something much better. You get the entire $18,000 out of your taxable income in the first place.

Join us for a discussion of this concept. Then ask your tax preparer or estate planning attorney if you benefit from using qualified charitable distributions.