The Wiser Financial Advisor: QCD's For Retirees #142

In this episode, Josh Nelson talks about Qualified Charitable Distribution which is a direct transfer of funds from your IRA to a qualified charity. Unlike regular withdrawals from your IRA, which are almost always taxable, QCDs allow you to donate money tax free. To help understand he answers 2 important questions. 

1) Can I take an itemized charitable deduction for my QCD on my income taxes? 

2) How do I set this up? 

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Transcript

Wiser Financial Advisor – QCDs for Retirees

Hi Everyone, and welcome to the Wiser Financial Advisor podcast with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money. This is Josh Nelson, Certified Financial Planner, founder and CEO of Keystone Financial Services. Let the financial fun begin!   

We are a fee-only wealth management firm, a fiduciary, and our advisors are all Certified Financial Planners, which is the gold standard when it comes to financial planning in the United States of America. Here on this podcast, we help you make smarter financial decisions and build a life of financial freedom. Today we're diving into a strategy that can be a game changer for retirees who are at least 70 1/2 years old and want to give to charity while also being tax savvy: Qualified Charitable Distributions, or QCD.

If you have a Traditional IRA, this is something that could help you on your taxes. It also could help you from an estate planning standpoint in the long run. So, Qualified Charitable Distribution is a direct transfer of funds from your IRA to a qualified charity. Unlike regular withdrawals from your IRA, which are almost always taxable, QCDs allow you to donate money tax free. It's about the only way you can do that. We're not talking about Roth IRAs here, just Traditional IRAs. In other words, pretax IRA's. There's tax liability on these IRA's that would either be recognized by you or by your heirs someday when you pass. The idea here is that you can reduce your taxable income while supporting a charity that you care about. It could be a church charity or any kind of 501C3 that is eligible to receive those funds, a win-win situation if you're already thinking about giving to charity or maybe already doing some kind of ongoing contribution. A QCD could be a way to give to charity and also reduce your tax liability. 

For example, let's say you're 72 years old and you want to donate $5000 to your favorite charity. Instead of withdrawing the money from your IRA, paying taxes on it and then writing a check to the charity (which is what most people are doing), you can instruct your IRA custodian that you want to do a QCD. Here at Keystone, we use Charles Schwab and Fidelity. If you notify us that you’d like to do a QCD, we would work with either Fidelity or Schwab to get this done. In this example, we’d send $5000 directly to the charity as a QCD. The end result is that the $5000 never gets added to your taxable income when you're filing your taxes. It's important to list it correctly because you're still going to get a 1099 R showing that there was a distribution taken out, but when it’s marked correctly on your taxes, it shows up as a nontaxable distribution, which would lower the taxes. Potentially this can affect things like Medicare premiums, Social Security, taxation on capital gains, all kinds of things when it comes to the tax code. 

There are a few key rules to go over before we dig into a couple more details. Number one, you’ve got to be at least 70 1/2 years old to make a QCD. If you're younger than that, this does not work. You can be as old as you want after 70 1/2, but you must be at least 70 and half. Number two, the maximum QCD amount for 2025 (and it changes every year) is $108,000. That's the maximum amount that you could do if you’re single. If you are married, both you and your spouse could do up to 108,000. Number three, the funds must go directly from your IRA to the charity. You can't withdraw the money yourself first and then make the contribution. It must go directly from your custodian to the charity. Also, be aware that not all charities  qualify. Donor advised do not qualify, and neither do private foundations. It has to go to a 501C3, one that you do not control. 

Why should you consider this? Number one is tax savings. The QCD is not counted as taxable, so it can lower your overall tax bill. That's especially valuable if you don't itemize your deductions and instead are taking the standard deduction, which is almost everybody now—over 90% of people, according to the experts. There aren’t many people that are even eligible to take itemized deductions anymore. What that means is that if you're taking money out and then writing a check to the charity, you're not getting a tax benefit. Of course, you're supporting the charity because you care about their cause. Great. But it's important to think about whether there’s a way they could get those funds and you could also get a tax advantage. 

A QCD does reduce your Required Minimum Distribution (RMD) from you IRA. If you're 73 or older, the current rules say you are required to take RMDs. QCDs count towards satisfying that requirement, meaning you could lower your taxable income for the year. So it's important that you do it early in the year because to reduce your RMD, they actually do look at RMD first, as far as withdrawals from accounts. So your QCD contribution would help you lower that. This could possibly reduce Medicare premiums. I mentioned this before because overall this could help you keep your adjusted gross income lower and adjusted gross income is oftentimes what the IRS is looking at as far as whether you go over certain levels. 

With QCDs, there's a direct impact on charities. Your favorite charitable organizations, whether a church or some other nonprofit will receive the full amount of your donation. They don't pay taxes anyway, so they receive your donation without you having to deal with the tax liabilities. Bottom line is that everybody ends up having more money in the end. Charity still gets the donation, and hopefully you end up with more money in your pocket. 

Common questions about QCDs-

Can I take an itemized charitable deduction for my QCD on my income taxes? 

No, because the QCD is already excluded from taxable income, so claiming a deduction would be double dipping in the eyes of the IRS. 

What happens if I take money out first and then donate it? 

If you withdraw from your IRA first, that money will be taxed as ordinary income. You can still donate; it's not that you can't, but you wouldn't get the tax benefits of the QCD. 

Can I make do a QCD from a 401K or other retirement account? 

No. QCDs must come from a Traditional pretax IRA, not a Roth, not a 401K, not a 403B, not any of the other designations out there. You might considering rolling those moneys into an IRA just so you could do a QCD if you still have leftover retirement money from an old employer. 

How do I set this up? 

You contact your IRA custodian or your advisor. If you're working with us, request that the QCD be sent directly to the charity. You will need to provide the charity’s tax ID number and mailing address. This is important because sometimes charities have similar names or there might be multiple tax IDs under a certain charity. You want to make sure it goes to the organization you want it going to. 

QCDs are a powerful tool for retirees. So, if you're not quite 70 1/2 yet, just know that this is a tool in the toolbox you can use later, not only to assist your tax situation, but also to help you give to charities you intend to benefit with your donations. You're almost certainly going to get more tax advantage by doing it this way versus trying to take an itemized deduction. 

If you found today's episode helpful, please share it with a friend who might benefit from learning about QCDs. It's something more and more people are learning about, but it's important that people are aware so they know what they can and can't do, especially because these rules change constantly. That's one big advantage of having a Certified Financial Planner and fiduciary that you work with, whether that's us here at Keystone Financial, or somebody else. 

Thanks for tuning in. Until next time, be well and God bless you and your family. Have a wonderful week.

We love feedback and we'd love it if you would pass it on to me directly at Josh@KeystoneFinancial.com . Also, please stay plugged in with us for updates on episodes and help us promote the podcast by rating US five stars and subscribing to us at Apple Podcasts, Spotify or your favorite podcast service.

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult your attorney, accountant, financial or tax advisor prior to investing. Investment advisory services offered by Keystone Financial Services, an SEC registered investment advisor.