What Is a QCD (Qualified Charitable Distribution)?
This is a new, effective strategy for those investors age 70 ½ or older subject to RMD’s (required minimum distributions). Note: If you are a beneficiary for an IRA younger than age 70 ½, the QCD strategy is NOT an option for you. You must be 70 ½ to be eligible. This strategy has become very compelling under the new tax laws, which eliminated a lot of deductions and raised the standard deduction. As a result, many will not be itemizing this year, thereby not receiving the charitable deduction. A QCD allows taxpayers claiming the standard deduction to get a tax break for giving to charity.
How Does it Work?
By using the QCD, you can directly transfer money from your IRA to the charity of your choice (only IRAs- NOT 401ks). The charity must be a 501 (C) (3) organization. Private foundations and donor-advised funds don’t qualify. By doing this, it excludes that income from the IRA and the amount you give counts toward your RMD. If you have already taken your RMD for the year, you can still do a QCD, and it will still be excluded from income, which will lower your IRA balance and possibly next year’s RMD, but you will still have to report the RMD you took earlier in the year. You are not getting a charitable deduction in the way you used to, but essentially it is having the same effect because it is being excluded from income. You are not limited to your RMD as far as your QCD amount. You can give up to $100,000 per person/per year.
What Do I Need to Do?
You will need to contact your charity of choice to see if they are set up for this. Unfortunately, not all of them are. You will also need to contact your custodian (Schwab, Fidelity, etc.) to determine what they require, and their overall process to administer the QCD. However, some brokerages may require you to use their IRA distribution form or meet other requirements. There are various methods including, having the money transfer directly from your custodian to the charity on your behalf or writing a check from your IRA account made out directly to the charity. However, many IRA custodians don’t allow check writing directly against IRAs:
- Fidelity allows it but asks that you confirm you aren’t automatically having tax withheld, as the distribution is not taxable, and to ensure the charity cashes it before year-end.
- Vanguard offers check writing, too, but asks that a form is completed or a call be made to make the transfer for the donation to count as a QCD.
- T. Rowe Price requests clients use a form, which requires a notary if the distribution amount is $10,000 or more. T. Rowe Price then sends the check directly to the charity on behalf of the client.
- Schwab requires the QCD to be paid directly from the financial institution to the charity, and a distribution form is also required.
The key takeaway is to contact your custodian and find out what they require.
Word to the Wise
- You can not write out a check from your personal checking account and give it to the charity, otherwise, the QCD strategy will fail.
- Maintain a paper trail.
- Request a receipt for tax purposes from the charity.
- Don’t accept freebies from the charity. There is a no benefit back rule. If you accept something back from the charity, the QCD fails.
The Qualified Charitable Distribution (QCD) can be a very effective strategy for those age 70 ½ or older, who are subject to RMD’s. Don’t delay in finding out if this strategy is right for you. You need to have it completely executed (including the charity cashing the check) by December 31st!
Sources: Kiplinger and Morningstar
© Geier Asset Management, Inc. Dec. 2018. Gregory Palacorolla, CFP ® is Director of Wealth Management for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of December 2018 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.