Common Qualified Charitable Distribution Mistakes

Common Qualified Charitable Distribution Mistakes

A Qualified Charitable Distribution is one of the best tax planning and charitable giving strategies available to retirees. For those that give regularly in retirement, they should consider this as part of their retirement plan. A Qualified Charitable Distribution is a provision in the tax code that allows you to withdraw your money from your IRA tax free as long as it goes directly to a qualified charity.

When you normally withdraw money from your IRA or 401K, every dollar you pull out is taxable to you. But, if it’s done as QCD, that is completely tax free. Ultimately, a QCD gives you three tax benefits. If you think about it, you put money into your IRA or 401K that you’re not taxed on. Then you’re also not taxed on any of the growth that you’ve had on your investments over a 20 or 30 year career.

And then lastly, you’re able to pull that same money out tax free as long as it goes to a qualified charity. So, this has huge tax savings if done properly. But despite these benefits, there’s also many downfalls or mistakes that investors make.

Who is eligible for a Qualified Charitable Distribution?

So I wanted to talk about a few of them and how to avoid them. First, is that this strategy is only available to those that are at least 70.5 years old. The maximum amount that you can do is $100,000 per year. That is adjusted for inflation, so that will go up over time.

Second, is that this is only available within IRA accounts. So, many retirees have 401Ks or 403Bs and may wonder if it’s available within their plans. However, it is not. QCDs are only available within an IRA account. So one way that you can get around that is by simply rolling over a part or all of your funds into an IRA account to be able to do this strategy.

Third, a QCD must be a direct transfer from your IRA to the qualified charity. I have a client of mine who had the ability or a feature on his IRA to write a check from time to time, and that’s how he was doing his QCDs.

However, this is not eligible for a QCD. After we talked to him, we explained that this is not a direct transfer and it has to come directly from the custodian like TD Ameritrade, Fidelity, Vanguard, etc., in order for him to qualify.

Fourth, a QCD is not an itemized deduction. This is important because the IRS doesn’t want investors to double dip in their tax savings. So, I like to remind everyone that a QCD allows you to avoid the tax so it’s a tax free income, but it is not considered a tax deduction.

Lastly, is the reporting and reporting is such an important part in order to get a benefit from this strategy. The IRS has a lot of different codes on how money is distributed from an IRA, but they don’t have a specific code for a QCD. However, the IRS has issued some guidance on this and there’s some instructions on the IRS.gov website for that. But if it’s not reported correctly, it’s as if it never happened. So you need to make sure it’s done, correctly.

Conclusion

Qualified Charitable Distributions ultimately gives retirees the opportunity to save taxes and accomplish their charitable giving goals. Every retiree that regularly gives to charity, is over age 70.5, and has an IRA should consider how QCDs can better help and enhance their retirement.