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Use Your IRA Charitably with the QCD

By: Robert Gordon

By: Robert J. Gordon, MBA, CFP®, AIFA®

2010 was a contentious year in American politics with the Democrats and Republicans battling over the extension of Bush-era tax cuts which would have expired on December 31, 2010. After much wrangling and backroom negotiating, a deal was struck. On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Embedded in this tome is a little provision in section 725. It is the extension of the Qualified Charitable Distribution (QCD). What is the QCD? The QCD allows traditional or Roth IRA owners who are at least 70½ years of age to exclude from gross income up to a total of $100,000 in distributions that are paid directly from IRAs (excluding SEP or SIMPLE IRAs) to qualified charities. These distributions also satisfy the IRA owner’s required minimum distribution (RMD) requirement.

QCD in your future?

Are you at least 70 ½ years of age?

Are you charitably-inclined?

Is your annual RMD more a frustration than a welcome source of income?

If the answer to all of these questions is YES, the QCD may be for you! Without the QCD, a charitable contribution would increase gross income and the contribution would be subject to the charitable contribution limits detailed in IRS Publication 526.

John & Mary Retired (both 75 years of age) have $125,000 in taxable income before their RMDs. They live very comfortably on that income and they typically end up investing their RMDs each year. Mary’s rollover IRA has a total of $3.0 million and John has a rollover IRA with $1.0 million. They have no heirs and would like to see a substantial amount of their assets used to support charitable causes primarily during their lifetimes. Using our Required Minimum Distribution calculator, Mary’s RMD is approximately $131,000 and John’s RMD is approximately $44,000. If they decided to make those contributions without the QCD:

Without the QCD      
    Mary John
Pre-RMD Taxable Income   100,000 25,000
RMD   131,000 44,000
Total Taxable Joint Income   300,000  
Estimated Tax $ 77,000  
 

 

Taking advantage of the QCD opportunity yields a significant tax savings as shown below.

With the QCD      
    Mary John
Pre-RMD Taxable Income   100,000 25,000
RMD   131,000 44,000
QCD   (100,000) (44,000)
Total Taxable Joint Income   156,000  
Estimated Tax $ 32,000  
       
Estimated Tax Savings $ 45,000  

 

As shown, John only contributes his RMD amount but he could instead to decide to do the QCD with $100,000 taken from this IRA which could reduce his future tax liability. To qualify as a QCD, the IRA trustee must make the distribution directly to the qualified charity. Distributions which the IRA owner actually receives do not qualify as QCDs. The donation shows on your IRS Form 1099-R and the IRS has detailed a procedure to properly account for the special treatment of the distribution. Make sure your tax professional is aware of the QCD opportunity and its details to garner the greatest benefit!

A Few Caveats

Any QCD in excess of the $100,000 per IRA owner exclusion limit is included in income just like any other IRA distribution. If your IRA includes nondeductible contributions, the portion of the distribution that would otherwise be taxable income receives the preferential treatment first and then the taxable portion is added to your income as normal and is taxed at your highest marginal rate.

Also, the QCD doesn’t apply if the funds are donated to a donor-advised fund, a supporting organization, a charitable gift annuity or a charitable trust.

There can be no reduction in the charitable amount under this provision due to value received in exchange (something of value given to the donor such as a charity dinner or tickets to a game).

Don’t Miss This Opportunity

For the right person or persons, this can be a great opportunity. Note that, while the media talks about most of the provisions of the act expiring in 2012, this one expires at the end of this year. See your tax and financial planning professional to see if this makes sense for you.