During the calendar year that you reach the age of 70 ½, you have to start taking required minimum distributions (RMD’s) from your tax deferred retirement accounts (IRA and/or 401k). For the first year, you are required to withdraw about 3.6% of the total of all of your account balances as recorded on January 1st of the year that you turn 70 ½. This percentage increases each year so that when you reach the age of 115, you are required to withdraw 52.6% of your account each year thereafter.
For those investors who have properly saved for retirement, the RMD can be a significant amount of income that may push them into higher tax brackets. The Qualified Charitable Contribution (QCD) is a method of withdrawing your RMD from your tax deferred retirement account tax-free as long as your RMD goes directly to a qualified charity. The main benefit of the QCD is that you can donate funds to a qualified charity, but at the same time, you don’t have to itemize the charitable contribution and you can take advantage of the newly raised, higher standard deduction.
Of course as you can imagine, there are some rules regarding QCD’s. First, you must be 70 ½ or older to make a QCD. Also, the QCD amount can not be more than your RMD or $100,000, whichever is lower. And finally, you must make your QCD before the end of the calendar year, December 31st.
The distribution must be made out to the qualifying charity. If you take a distribution and then donate the funds to a charity, that doesn’t count. You can itemize that charitable donation, but you can not count that distribution as a QCD.
And that is the real benefit. The QCD allows you to withdraw the funds tax free from your account, counts it against your RMD, and lets you take the standard deduction on your tax return. It is a great tool to not only lower you tax bill, but also makes the world a better place.