Good news! Qualified charitable distributions (QCD) are now permanent. This feature allows IRA owners and beneficiaries who are at least 70½ or older to transfer up to $100,000 annually from an IRA directly to a charity without including that amount in their income. The QCD option, which initially became available in 2006 with a Dec. 31, 2007 expiration date and had been extended several times by Congress, finally became permanent at the end of last year in the Consolidated Appropriations Act of 2016.
Where an individual may wish to take a distribution from his or her IRA and donate that amount to their favorite charity, the additional income may result in the individual owing more taxes since certain IRA distributions must be included in income. However, by making a donation to a charity through a QCD, the individual can avoid recognizing the additional income.
A QCD is a nontaxable distribution from an IRA (other than a SEP or SIMPLE IRA) made directly by the IRA trustee(s) to a qualified charity. While a QCD cannot be made from an employer-sponsored retirement plan (e.g. a 403(b) plan), any amounts rolled over from a retirement plan to an IRA may subsequently qualify as a QCD.
Another advantage is that a QCD can be used to offset all or a portion of an individual’s required minimum distribution from the IRA. An IRA owner is required to begin receiving annual minimum distributions from an IRA when he or she reaches age 70 ½. In addition, IRA beneficiaries are also required to receive annual minimum distributions from an IRA after the death of the owner.
The following summarizes the rules for a QCD:
- An individual must be at least age 70½ or older when the distribution is made from the IRA;
- The total of all QCDs from all of an individual’s IRAs cannot be more $100,000 in a taxable year. For joint filers, both spouses can use the QCD feature and exclude up to $100,000 each;
- The distribution must otherwise be includible in the individual’s gross income. If an IRA includes nondeductible contributions, special ordering rules apply;
- The IRA trustee must make the distribution directly to the qualified charity. That means an individual is not permitted to actually receive a distribution from an IRA and then contribute that amount to the charity. That is, if an individual first receives a distribution from an IRA and then contributes that amount to the charity, the distributed amount would be includible in an individual’s gross income;
- An individual is not permitted to take a deduction for a QCD on his or her income tax return, i.e., no “double-dipping”;
- The direct distribution must be made to an organization qualified under Code Section 170(b)(1)(A) (other than supporting organizations described in Code Section 509(a)(3) or donor advised funds that are described in Code Section 4966(d)(2)).
- Examples of eligible entities include educational institutions, hospitals, medical research organizations and publicly-supported organizations.
As a note of caution, while a QCD is a tax-free transfer for federal income tax purposes, some states may not recognize the concept of QCDs and thus the transfer may be subject to state taxes.
A QCD is a valuable tool for individuals who want to make charitable contributions from their IRAs without recognizing additional income. An individual who is considering a QCD should seek the advice of his or her tax advisor to ensure that all financial and estate planning objectives are met.
Lynn Knight, CEBS, is a member of Technical Services for Tax-Exempt Markets at Voya Financial. Lynn has worked extensively in the retirement plan field for a broad spectrum of defined contribution plans, including 403(b), 401(k) and 457(b) plans, both at law firms and with retirement service providers.
This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.