Charitable IRA Rollover Can Help With Taxes

One downside of contributing to a traditional IRA is that, once you reach age 70.5, you must begin taking required minimum distributions (RMDs) and pay taxes on those distributions. But you can use a qualified charitable distribution (QCD) to avoid taxes on up to $100,000 in RMDs per year.

Also known as a “charitable IRA rollover,” a QCD goes directly from your IRA to an eligible charity. It counts as a distribution for RMD purposes, but it’s excluded from your income. It also has certain tax advantages over traditional charitable contributions.

Advantage of QCDs Over Ordinary Donations

When you receive an RMD, because it’s from an IRA, it gets taxed on the way out instead of the way in. One strategy for reducing these taxes is to donate the taxable portion to charity. If the donation is fully deductible, it will offset the taxable income that’s generated by the distribution. Depending on your tax situation, this strategy may be less effective than a QCD:

• A charitable deduction will benefit you only if you itemize. And that’s less likely now that the Tax Cuts and Jobs Act (TCJA) has nearly doubled the standard deduction.
• Even if you itemize, adjusted gross income (AGI) limits may reduce your charitable deductions. For instance, deductions for cash gifts to public charities are currently limited to 60 percent of AGI.
• By boosting your income, IRA distributions may trigger AGI-based rules that punch up certain taxes or deflate the benefits of certain tax breaks.

A QCD avoids these issues because it bypasses your income altogether. It allows you to take the equivalent of a charitable deduction without increasing your AGI. Another advantage of QCDs is that they come from the taxable portion of your IRA first, increasing the portion of the remaining balance that’s nontaxable.

QCD Requirements

If you’re considering a QCD, you must meet several requirements:

• You must be at least 70.5 at the time of the distribution.
• The IRA must distribute the funds directly to an eligible charity.
• The donation must be “otherwise deductible.” In other words, it would have been fully deductible had you funded it with non-IRA assets. If you receive something of value in exchange for your gift (tickets to an event, for example), it’s not a QCD.
• The distribution must be “otherwise taxable.” It’s not a QCD to the extent that it would be tax-free if distributed to you directly.

In addition, QCDs are subject to the same substantiation requirements as other charitable donations.

Is a QCD Right for You?

If you don’t need your IRA funds for living expenses and you plan to donate to charity anyway, a QCD offers a tax-efficient strategy for satisfying your RMD requirements. The TCJA may enhance the advantages of QCDs because it increased standard deduction amounts, but keep in mind that these amounts are scheduled to return to their previous levels in 2026. If you think that a QCD could be right for your tax plan, or have any further questions about it, Contact a finance professional at Froehling Anderson today.