QCD from an IRA, a 401k, a 403b?


Are you 70½  or over like some of us?


Do you have an IRA, a 401k, 403b or other retirement account and need to take out a certain amount every year (Required Minimum Distribution or RMD)? Well, you may want to make a QCD (a Qualified Charitable Distribution). 

Now there's a way to reduce your taxable income by donating directly from your retirement account to qualifying non-profits, and your investment professional will take care of it for you! 

QCDs can start as early as 70½ (the account owner's 70½ birthday), even though minimum distributions aren't required until age 73.

All you have to do is give clear directions, e.g. Names of the non-profits (e.g Food Bank, Cayucos Land Conservancy, your church); their addresses, and the amount you'd like to give to each. The amounts are deducted from your retirement account and sent directly by your investment institution to your favorite charities instead of being added to your taxable income.

Here are the details, shared by Scott McManus of Cayucos Wealth:

Save on Taxes While Doing Good Under the New Tax Law

Plan Now for your 70½  Retirement Account Gifting

For many of us folks who are 70½ or over and have retirement accounts either from contributions or rollovers from company plans, there is a way to make gifts directly from your retirement account.  This has been in effect for a few years now, but with the onset of the new tax law in 2018, it makes the utilization of this opportunity a no-brainer for many charitably-minded older people.

While the new law cut tax rates, it also severely curtailed itemized deductions. State and local income taxes along with property taxes are now capped at a combined $10,000, whether one is single or married filing jointly. Miscellaneous itemized deductions like tax preparation fees, investment costs, etc. are no longer deductible at all for federal income tax purposes (keep in mind that this limitation on deductible taxes and elimination of miscellaneous itemized deductions does not affect state income tax – only federal).

These reductions in federal deductions are somewhat offset by a new higher standard deduction (though taxpayers also lost the personal exemptions deduction). For single folks over 65, the standard deduction for 2023 is $15,700. For married folks filing jointly who are both over 65, the standard deduction is $30,700.

For many people who have their medical expenses covered with a good insurance plan, and who have little or no mortgage interest, their total itemized deductions now might just be the maximum $10,000 they can claim in state and local/property taxes. For a single person over 65 like this who gets a standard deduction of $15,700, the first $5,700 they give to charity will thus provide them with no federal tax benefit since they still won’t exceed their standard deduction, which they get simply by filing. For married folks who only have the $10,000 in taxes as an itemized deduction, the first $20,700 of charitable giving will offer them no federal tax benefit since they still won’t exceed their standard deduction.

If these taxpayers are 73 or over and have a retirement account, they must take Required Minimum Distributions from their retirement account. Tax law, however, allows them to make up to $100,000 in charitable contributions each year directly from their IRA that will not be counted as income on their return.  These Qualified Charitable Distributions (QCD’s) will also not count as a charitable deduction on their return, but for many people like those in the examples above, they wouldn’t get a full deduction anyway. So this offers them a tax-wise way to be charitable with dollars that have never been taxed.  Let’s take an example:

John and Susan Landcare are both 73 and are in the 32% marginal federal tax bracket. John has an IRA that he rolled over from his company 401(k) plan when he retired.  John and Susan paid off their mortgage a while back, and they have excellent Medicare supplement plans to augment their Medicare benefits. Their combined state income tax and property tax is $15,000 per year, but federal tax law caps that at $10,000 of deductible expense.  John’s Required Minimum Distribution (RMD) from his IRA for 2019 was $20,000. John and Susan would like to benefit the Cayucos Land Conservancy with a $15,000 charitable donation.

If John takes his $20,000 IRA distribution and they then write a check to the CLC, they will have to claim the $20,000 in income and will have itemized deductions of $25,000: their $10,000 in taxes and their $15,000 charitable gift. But since they get a standard deduction of $30,700, they will use the standard for federal tax purposes.

But John is a smart guy who recognizes the opportunity he has. John takes a $5,000 distribution from his IRA and then gifts the rest ($15,000) of his $20,000 Required Minimum Distribution from his retirement account directly to the CLC through a Qualified Charitable Distribution.

So John & Susan now claim only $5,000 in income instead of $20,000, and they still take the same $30,700 standard deduction on their taxes. They’ve saved $4,800 in taxes ($15,000 X 32%) by using the QCD from John’s IRA for their gift! With that savings, the Landcares can actually give the whole $20,000 RMD to CLC from John’s IRA!

Keep in mind that a QCD must come directly from the retirement account to the charity – it cannot be made out to the retiree and then signed over. Some custodians (like Charles Schwab) even offer check-writing now so that the account holder can write a check directly out of the retirement account to the charity! Of course, they need to have sufficient cash in the account when they write the check. And the check needs to be cashed by the charity before year-end for it to count as part of the IRA participant’s RMD for that year. It’s best to consult with your financial planner and/or tax advisor.

Take-home point: Under the new tax law, QCD’s from retirement accounts can offer a significantly enhanced tax-advantaged method of philanthropy for people over 70½ .