If you turn the age of 73 (or are older) by the end of 2024, and have an Individual Retirement Account (IRA), you must take a Required Minimum Distribution (RMD). Failing to do so may result in hefty penalties (up to 25%).

A Required Minimum Distribution, will increase your income and potentially your tax liability. One viable way to help lower your income while taking your RMD, is by donating all or some of it, directly to a qualified charitable organization. This is known as a Qualified Charitable Distribution (QCD).

Qualified Charitable Distributions: Who can Benefit and How it Works

A Qualified Charitable Distribution (QCD) is the transfer of your IRA funds directly to an eligible charity. The QCD amount is excluded from your income and is non-taxable.

The greatest advantage of a QCD is that it can help fulfill your Required Minimum Distribution (RMD) for the year, given that certain stipulations are met.

Requirements for making a QCD

• You must be 70 ½ years or older, on the distribution day to take advantage of a QCD.
• The maximum QCD amount allowed for 2024 is $105,000.
• The QCDs may be made to several different qualified charities. On a jointly filed tax return, each spouse can make a QCD from their own IRA account up to the $105,000 limit.
• The charity must be a 501(c)(3) organization and be qualified to receive contributions that are tax deductible. (See the IRS database of tax-exempt organizations IRS Look-up Tool for more information)
• You can contribute part, or all, of your required minimum distribution. If you contribute more than the maximum amount, the excess will be considered income. Also, if you contribute less than your RMD as a Qualified Charitable distribution, the balance of the RMD would be payable to you and that amount would be included in your income.
• The amount of your Qualified Charitable Distribution cannot exceed your total income.
• The QCD must come out of the account by your RMD deadline, which is generally by December 31^st. Coordinate the timing to properly execute the QCD. The QCD should be done first before the RMD. A QCD can only be done in/for the current calendar year.
• The QCD funds must go directly to the qualified charity, be sure to inform your IRA custodian of your intention to donate your distribution and the amount. Any funds transferred to you, which you then distribute to the charity, will not be considered a Qualified Charitable Donation.

Potential Tax Traps

• QCDs are not deductible as charitable contributions on Schedule A.
• A Qualified Charitable Distribution can only be made from an Individual Retirement Account (IRA). Other retirement accounts, 401(k) and 403(b) accounts, are not eligible.  Roth IRAS are generally not QCD eligible because Roth distributions are tax free.
• Your 1099R form has no special code for a QCD. Your tax professional can assist with the proper reporting on your income tax return

Qualified Charitable Distributions can be a great strategy for those looking to lower their taxable income, while fulfilling their Required minimum Distribution. And, as a bonus it can help charitable organizations. QCDs provide greater tax savings than cash donations for which charitable tax deductions are claimed.