Broker Check

The ABCs of QCDs

| January 03, 2022

Many have never heard of QCDs. Quite confusing declaration? Quality cheese dip? Quick call dad? In the financial world at least, QCD refers to a Qualified Charitable Distribution from a traditional IRA. In other words, you’re giving to charity using funds from your IRA.

To shed some light on these distributions, here are the ABCs of QCDs. 

  1. QCDs are not taxable IRA distributions.
    • Normally a distribution from a traditional IRA would be taxable. A qualified charitable distribution is an IRA withdrawal taken by an individual over 70 ½ and sent directly from the IRA to a qualified charity, resulting in a tax-free distribution.  
  2. QCDs are still reported on your tax return.
    • You will receive a Form 1099R for QCDs and must report them on your return; however, they will be reported as not taxable and will not be included in your income.
    • QCDs are not deductible as charitable contributions on Schedule A. Since the QCD is excluded from taxable income you cannot also include it as an itemized deduction (this would be deducting the contribution twice). 
    • Normally charitable contributions do not have any tax benefit for individuals unless they are itemizing deductions on Schedule A. However, for individuals that do not itemize, taking a QCD would allow them a tax benefit. Excluding the QCD from taxable income may result in less Social Security income being taxed or lower other income thresholds.
  3. QCDs can be used to satisfy all or part of your Required Minimum Distribution (RMD). 
    • If you do not need your RMD, a QCD can be a good way to distribute your RMD and not pay taxes on the distribution.
    • Using a QCD to satisfy your RMD can be advantageous for individuals, as RMDs normally increase an individual’s taxable income (and may push individuals into a higher tax bracket).
    • The maximum amount allowed for a QCD is $100,000 per individual. Withdrawing a large QCD can be advantageous for individuals that want to reduce the balance in their IRA to decrease future RMDs.

 

If you are already 70 ½ or older, have a traditional IRA, and regularly contribute to a charity, let’s talk more about QCDs for you.