How to donate your RMD using qualified charitable distributions
Can you give money to charity using your IRA? For individuals 70-1/2 or older the answer is usually yes. What many retirees don't know is they can donate all, or a portion of, their required minimum distribution (RMD) directly to charity. It's called a qualified charitable distribution or QCD.
You can also make charitable distributions directly from an IRA before RMDs begin. The Secure Act raised the RMD age for some taxpayers to 72, but didn't raise the QCD age from 70-1/2. Here's how to donate your RMD using a qualified charitable distribution.
A QCD can be a very tax-effective way to support a cause. However, as with any financial and tax strategy, it's important to first understand the details and limitations. Qualified charitable distributions do not provide a charitable deduction for taxpayers, regardless of whether the you itemize deductions.
Instead, with a qualified charitable distribution, a check is sent directly from an IRA to charity. This allows the donor to exclude the amount from taxable income. To illustrate the benefits, here are four ways RMDs can increase taxes:
For retirees who are charitable and over age 70-1/2, a qualified charitable distribution is worth considering.
As with any tax strategy, it's important to pay close attention to the IRS rules. Here are some of the major ones:
If you're working with a CPA, ensure they're aware of your financial moves. QCDs, 60-day rollovers, backdoor Roth, and non-deductible contributions are a few examples.
In general, when reporting qualified charitable distributions on your tax return, you'll report the full amount on the line for IRA distributions. On the line for the taxable amount, enter zero if all IRA distributions qualify as qualified charitable distributions. You may also need to file Form 8606 if you've previously made non-deductible IRA contributions or take a QCD from a Roth IRA. Consult your tax advisor for advice before making QCDs or filing your tax return.
QCDs can offer big tax savings as tax rates on regular income are usually the highest. But there are other ways to give to charity. If you don't benefit from itemizing your tax deductions and are of age, then QCDs could be a good option. In 2021, the standard deduction will be $12,550 for single filers and $25,100 for married couples, filing jointly. With the SALT limit capped at $10,000, it's not always easy to benefit from itemizing given the high standard deductions.
Before deciding on a charitable giving strategy, consider other ways to give, including giving appreciated stocks, donating cash, and bunching donations to benefit from itemizing deductions.
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