Why You Should Consider Sending Your RMDs Straight to a Charity

By Brett Gottlieb

If you’re like many of our clients, you live generously. You know that the world goes far beyond just you and your family and you want to leave your mark on it, making a difference when and how you can. You are grateful for the opportunities you have received and want to pass it forward in a meaningful way.

That’s your purpose in giving to charity. Our job at Comprehensive Advisor is to help you do it in the wisest way possible. Every dollar that we can save you in taxes is another dollar that you can use to make the world a better place.

One way to do this is to send your required minimum distributions (RMDs) straight to a charity instead of transferring the money into your bank account first. This is called a qualified charitable distribution (QCD).

Benefits of Making a Qualified Charitable Distribution

While cutting out yourself as a middle man saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first.

When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.^[1]

Having a lower taxable income also helps in other ways, such as making you eligible for more tax credits and deductions with a lower taxable income. Not to mention, you may be able to avoid paying extra for Medicare.

Are You Eligible to Make a Qualified Charitable Distribution?

Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made.

In addition to having the right kind of account, these other requirements must be met:

• You must be age 70½ or older.
• To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
• QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
• Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
• Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.^[2]

Is Your Charity Eligible to Receive a Qualified Charitable Distribution?

After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.

On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are:^[3]

• Private foundations
• Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
• Donor-advised funds managed by public charities on behalf of individuals, families, or organizations

How Are Qualified Charitable Distributions Reported?

Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding.

Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified.

Work With a Professional

Giving to charity is a top priority for you. You’re going to give regardless, so why not do so in a tax-efficient manner? QCDs are a great opportunity for anyone who is required to take minimum distributions from their retirement accounts.

Many specific rules and requirements must be met in order for distributions to qualify for exempt status, so it’s a good idea to work with an experienced financial professional to help ensure you make a QCD the right way. If you’re interested in learning more about qualified charitable distributions, our Comprehensive Advisor team is here to help. Email us at info@ComprehensiveAdvisor.com or call (760) 813-2125 to schedule a meeting so we can answer your questions.

About Our Advisors

Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly 20 years of combined insurance and investment experience. He graduated from California State University-Chico with two bachelor’s degrees in Business Administration and Economics. Brett is Life Insurance licensed in several states. He is passionate about guiding his clients on retirement income planning, helping each client pursue their specific retirement goals and defending the assets his clients have worked so hard to achieve. Brett is a California native and currently resides in San Elijo Hills with his beautiful wife and three children.

With a combined experience of over three decades in the financial services industry, our advisors hail from some of the largest independent broker/dealers and banking institutions in the country. They have dedicated their professional careers to creating personalized financial solutions for individuals and families who seek successful retirement planning and currently offer investment advisory services through AE Wealth Management, LLC. Our advisors take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County and beyond. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.

Neither the firm nor its representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Comprehensive Advisor are not affiliated companies. C.A. Financial & Insurance Services, CA Ins. Lic. #6000262. This material is intended to provide general information and is believed to be reliable, but accuracy and completeness cannot be guaranteed. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income, etc. generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 1143037 – 12/21

^[1] https://www.fidelity.com/learning-center/personal-finance/retirement/qcds-the-basics

^[2] https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds

^[3] https://www.kiplinger.com/article/taxes/t055-c032-s014-10-things-anyone-considering-a-qdc-should-know.html