Welcome to the world of charitable giving with Qualified Charitable Distributions (QCDs)!
If you’re a savvy retiree looking to make a positive impact on your community while enjoying potential tax benefits, you’ve come to the right place.
In this comprehensive guide*, we will delve into everything you need to know about a Qualified Charitable Distribution, including:
Bear in mind that it’s always important to consult a tax advisor to explore how QCDs can fit into your financial strategy for the current tax year and beyond.
Let’s dive in!
What is a Qualified Charitable Distribution?
A QCD is a powerful strategy that allows you to support your favorite charities directly from your Individual Retirement Account (IRA). To qualify for a QCD, you must be age 70½ or older, making it an ideal option for retirees seeking meaningful ways to give back while reducing taxable income.
How to Report a Qualified Charitable Distribution
Reporting your QCD correctly is crucial to ensure you reap the tax benefits it offers. When you make a Qualified Charitable Distribution from your IRA, the distribution is excluded from your taxable income.
To ensure smooth reporting:
1. Obtain the necessary forms
Start by obtaining IRS Form 1099-R from your IRA custodian. This form will show the total distribution amount, including any QCDs made during the tax year.
QCDs must be made directly to the charity by the trustee of the IRA. An IRA distribution, such as an electronic payment made directly to the IRA owner, does not count as a QCD. Likewise, a check made payable to the IRA owner is not a QCD.
2. Fill out your tax return
When filing your federal income tax return, report the total amount of the QCD on Form 1040. Make sure to designate the distribution as a QCD to have it excluded from your taxable income.
3. Keep records
Keep proper documentation of the charitable donations and QCDs made, including acknowledgment letters from the recipient organizations. Having these records will be valuable during tax audits and ensure accurate tax reporting.
Qualified Charitable Distribution from IRA
One of the most significant benefits of QCDs is their direct connection to your IRA.
As an IRA owner who is age 70½ or older, you can transfer funds directly from your traditional IRA to eligible charitable organizations.
This way, you support causes close to your heart while potentially satisfying your Required Minimum Distribution (RMD) for the year.
An RMD is the minimum amount of money that an individual with a tax-deferred retirement account, such as a traditional IRA, 401(k), or 403(b), must withdraw from their account each year once they reach a certain age.
The IRS imposes RMDs to ensure that individuals do not indefinitely shelter their retirement funds from taxes.
Generally, RMDs must commence when an account owner turns 72, according to the current tax rules under the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Notably, the maximum QCD amount allowed per taxpayer in 2024 is $105,000. For married couples with both spouses having IRAs, a combined donation of up to $210,000 is possible. In 2025 those numbers will increase to $108,000 for an individual and $216,000 for married couples.
Also, you can make a one-time election for up to $53,000 in 2024 ($54,000 in 2025) and have your QCD go into a split-interest gift such as a Charitable Remainder Unitrust (CRUT), Charitable Remainder Annuity Trust (CRAT), or Charitable Gift Annuity (CGA).
Note: A QCD cannot go into a Donor-Advised Fund or a Private Foundation, even though these are charities.
These contributions from your IRA to charitable causes provide an excellent opportunity to magnify the impact of your giving and support multiple organizations simultaneously.
Can I Make a QCD From My 401(k) or 403(b)?
No, you cannot use your 401(k) or 403(B) to make a Qualified Charitable Distribution.
QCDs can only be made from Individual Retirement Accounts. Specifically, QCDs are available to IRA owners who are age 70½ or older.
If you have a 401(k) plan and wish to make a charitable contribution, you would need to explore other options, such as:
- • Making regular charitable donations.
- • Rolling over your 401(k) or 403(b) into a standard IRA and then making the contribution.
Qualified Charitable Distribution 2024 Rules
As tax laws evolve, staying informed about the latest regulations is vital. Here are some key rules governing Qualified Charitable Distributions in 2024:
1. Age Requirement
To qualify for a QCD, you must be 70½ or older at the time of the distribution.
2. Indexed for Inflation
The maximum annual QCD amount is subject to inflation adjustments. Always check the updated figures for the current tax year to ensure compliance.
3. Age 73 Exception
Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, starting in 2020, the age at which you must start taking required minimum distributions was raised to 72.
However, the age for QCDs remains at 70½, providing you with the opportunity to contribute to charitable causes before RMDs kick in.
4. Charitable Donations and the Standard Deduction
Making QCDs can be particularly beneficial if you’re taking the standard tax deduction instead of itemizing deductions. QCDs allow you to support charities while still enjoying tax advantages.
SIMPLE and SEP IRAs
SIMPLE (Savings Incentive Match Plan for Employees) IRAs and SEP (Simplified Employee Pension) IRAs are both types of employer-sponsored retirement plans that provide opportunities for Qualified Charitable Distributions (QCDs) under specific conditions.
However, there are some key differences between these plans in terms of eligibility and contribution limits.
SIMPLE IRA and QCDs
A SIMPLE IRA is a retirement plan typically offered by small businesses with fewer than 100 employees.
As an employee, you can contribute a portion of your salary to the SIMPLE IRA on a pre-tax basis, and your employer will also make contributions.
Employees can contribute up to $16,000 (in 2024), or $19,500 if they are 50 or older.
Qualified Charitable Distribution Limits
As mentioned earlier, the maximum QCD amount allowed in 2024 is $105,000 annually per taxpayer ($108,000 in 2025).
Should you exceed this limit, any excess amount will be treated as a normal distribution, subjecting it to regular income taxes.
While QCDs are allowed from SIMPLE IRAs, you must:
- • Meet the age requirement of 70½ or older.
- • Have participated in the SIMPLE IRA for at least two years.
When you make a QCD from a SIMPLE IRA, the distribution is not counted as taxable income, offering potential tax benefits for those who wish to support charitable causes directly from their retirement savings.
SEP IRA and QCDs
A SEP IRA is a retirement plan primarily suited for self-employed individuals and small business owners.
Contributions to the SEP IRA are made solely by the employer and are tax-deductible. The maximum amount an employer may contribute (in 2024) is 25% of the employee’s compensation or $69,000, whichever is less.
SEP IRA owners are eligible for QCDs once they reach the age of 70½, and there are no additional participation or waiting period requirements like in the case of SIMPLE IRAs.
When QCDs are made from a SEP IRA, the distribution amount is excluded from the IRA owner’s taxable income, offering a tax-efficient way to support charitable causes.
Key Considerations
1. Contribution Limits: SEP IRAs generally allow for higher contribution limits compared to SIMPLE IRAs, making them a popular choice for self-employed individuals looking to maximize their retirement savings.
2. RMD Requirements: While QCDs from both SIMPLE IRAs and SEP IRAs can be used to satisfy Required Minimum Distributions, it’s essential to be aware of the rules surrounding RMDs for each type of IRA, as they may differ.
3. Tax Implications: As with any retirement plan and charitable giving strategy, it’s essential to consult with a tax advisor or financial professional to understand the specific tax implications and benefits of making QCDs from SIMPLE and SEP IRAs. They can help ensure that you meet all eligibility requirements and navigate the rules effectively.
Next Steps
Qualified Charitable Distributions present a compelling avenue for retirees to make a positive impact on their communities while potentially enjoying tax benefits. But let’s face it, navigating the complex world of QCDs can feel overwhelming.
Don’t worry — at the Convoy of Hope Foundation, we’ve got you covered!
We provide a simple, four-step process that makes sure your wealth is maximized for the greatest impact.
Step 1
Meet With
Our Team
They will work toward understanding your unique giving desires and how to pair those goals with the appropriate financial strategies.
Step 2
Create Custom Giving Road Map
Our team will create your custom giving road map — a detailed plan charting the course to your unique destination.
Step 3
Meet With Your Tax or Financial Advisor
Don’t worry, we’ll guide you through this process to ensure you’re confident in your ability to communicate what you want to accomplish.
We can even speak directly with your advisors to see that your wishes are followed.
Step 4
Ongoing
Check-Ins
Your charitable planning is a marathon, not a sprint — if you want to adjust the final destination of your giving road map, we’re committed to assist with any changes you want to make.
Schedule a call today and let’s kick off your journey to becoming a wise giver. Together, let’s make lasting positive change in this world.
*Disclaimer: Convoy of Hope and Convoy of Hope Foundation do not provide legal, tax, investment, or financial advice. The information in this article is intended for educational purposes only and should not be construed as professional advice. Donors are encouraged to consult with their own legal, tax, investment, or financial advisors when evaluating gifts to charity. Convoy of Hope and Convoy of Hope Foundation disclaim any liability arising from reliance on information provided herein.
