What’s a QCD—and Why Taxpayers Need to Know the Answer Now

Thanks to tax-law changes, qualified charitable distributions are more attractive than ever for IRA holders

By

Glenn Ruffenach

Sept. 23, 2018 10:02 p.m. ET

Older adults who donate to charities—and don’t like taxes—need to get very familiar, very quickly, with qualified charitable distributions.

That’s the advice financial planners are giving clients as the new tax law takes effect. These instruments have been around since 2006. But big changes in how deductions work on federal tax returns mean that QCDs are garnering new attention and new fans.

“We’ve run [tax] projections for a number of clients using QCDs, and it’s saving them a lot of money,” says Helen Modly, a certified financial planner with Buckingham Strategic Wealth in Fairfax, Va. “I think more people are going to realize that this is an effective tax-planning strategy.”

Of course, the calendar year is already winding down, and accountants and financial advisers are cautioning clients not to wait until late December to take advantage of QCD planning. Given that, here’s a primer on QCDs:

What is a QCD?

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A qualified charitable distribution is a withdrawal from an individual retirement account that is sent directly to a charity. In other words, the funds don’t pass through your hands. You instruct your IRA custodian to send the money straight to the group or groups you specify.

 

Who can do this?

You must be age 70½ or older at the time of the donation.

How do I benefit from using a QCD?

A qualified charitable distribution allows a person to “do good” and, at the same time, reduce her/his taxes.

After you reach age 70½, you are required to withdraw funds annually from your IRA and report the distributions as income on your tax return. So, if you’re required to withdraw $6,000 from your IRA in 2018, that will increase your income this year by $6,000.

But let’s say you are charitably inclined and plan to donate money to a half-dozen groups before year-end. If you tell your IRA administrator to send $1,000 to each charity, those contributions—in the eyes of the Internal Revenue Service—will satisfy your RMD for the year. And you wouldn’t need to include the $6,000, as you normally would, as income on your tax return.