Retirement Planning

Qualified Charitable Donations—A Great Gift for Unneeded RMDs

November 6, 2019
If you are taking unneeded RMDs, consider a QCD. Up to $100,000 can be directly paid to qualified charities every year, count towards your RMD, and the distribution is nontaxable.

Key Points

  • Some investors in their 70s and older will be required to take distributions from their IRAs whether they need the money or not.
  • If you don’t need the money from an RMD, consider a QCD.
  • The distribution is paid directly to qualified charities and can count towards your RMD.
  • The distribution is nontaxable (up to $100,000 per year).

Some investors in their 70s and older may only be taking distributions from their tax-deferred accounts because they must, not because they need the money to pay their bills. Required minimum distributions (RMDs) generally must be taken by the end of each calendar year for investors ages 70½ and older.* To the dismay of individuals with “unneeded” RMDs, these distributions create a taxable event that is somewhat out of their control.

Qualified Charitable Distribution

If you don’t need the money from an RMD to cover your expenses now or in the future and have tax-deferred assets in individual retirement accounts (IRAs), you could consider a qualified charitable distribution (QCD).

A QCD has three key benefits:

  1. You can give directly to the qualified charities you wish to support.

  2. The amount counts toward your RMD.

  3. The distribution is nontaxable (up to $100,000 each year).

Tax Considerations

What makes this option especially appealing to IRA owners who are charitably inclined is that you don’t need to itemize your tax deductions to take advantage of it. With the Tax Cuts and Jobs Act (TCJA) of 2017—when the standard deduction was increased—many tax filers stopped itemizing deductions in favor of the standard deduction. Taxfoundation.org estimates that the percent of itemizing taxpayers for 2019 will drop to just under 14% from over 31% pre-TCJA, with the largest drops being in the middle-income ranges. This means you can receive the tax benefits of these charitable contributions through the ease of claiming the standard deduction.

Ground Rules

If considering a QCD to count as your RMD, keep in mind the following:

  • Unlike RMDs, which can be taken at any time in the year the IRA owner turns 70½, the IRA owner must be 70½ or older at the date of distribution for the QCD.
  • A QCD can only be used with IRAs (except Simplified Employee Pension (SEP) or SIMPLE IRAs that are considered active—meaning the IRA owner is receiving ongoing employer contributions). Employer-sponsored plans are not eligible.
  • The distribution must be paid directly to one or more qualified charities. You cannot take the distribution yourself and then give money to charity and count it as a QCD.
  • The total amount you can distribute as a QCD is capped at $100,000 per calendar year per person. If your total RMD is less than $100,000, then the QCD can satisfy your RMD. If your RMD amount is more than $100,000, then the excess would be considered taxable income.
  • If a distribution has already been taken during the calendar year, you cannot redirect that money as a QCD. The distribution amount will be considered taxable income.
  • A QCD cannot be directed to donor-advised funds, private foundations, or charitable supporting organizations.
  • Be sure to notify your tax preparer of the QCD. IRA custodians will report the amount as a normal distribution.

Beat the Rush!

If you’re considering or want to learn more about QCDs, contact your IRA custodian. We find most of our client QCD transactions occur in December. You want to make sure the custodian has time to process the extra step of directing the money to your favorite charities. If you’re able to write a check from your IRA to the charity, make sure the charity cashes it prior to December 31, as the custodian may recognize the date the check clears as the distribution date.

Keep in mind, with a QCD, you are giving your money away. If you think you might need RMD funds at a point later in life, you can always reinvest assets from the distribution into a regular, taxable account. If you don’t see yourself needing that money, and you planned to give to charity anyway, the QCD tax savings could be a gift to yourself.

*Note that for your first year’s RMD, you have until April 1 of the year following the year that you turn age 70½ to take the distribution. If you are the original owner of a Roth IRA, you are not subject to RMDs.

This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.

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201911-999356