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For many retirees, the holiday season is the perfect time to give back. And there\u2019s one IRS-approved trick that can make that generosity go even further.<\/p>\n
A qualified charitable distribution, or QCD, is a direct donation from your IRA that can shrink your tax bill while helping your favorite charity.<\/p>\n
\u201cIt\u2019s one of the IRS\u2019 best-kept secrets for retirees,\u201d Ashton Lawrence, a certified financial planner at Mariner Wealth Advisors in Greenville, South Carolina, told CNBC (1).<\/p>\n
So what exactly is a QCD and how does it work?<\/p>\n
A qualified charitable distribution is a direct transfer from your pretax IRA to a registered charity. Instead of withdrawing the money and then donating it, which counts as taxable income because it impacts your adjusted gross income (AGI), you transfer it directly and keep the transaction off your tax return entirely.<\/p>\n
According to Fidelity, QCDs are best for retirees who are 70\u00bd or older and taking required minimum distributions (RMDs), who don\u2019t itemize deductions and have IRA balances that are typically mid\u2013six figures or higher (retirees with smaller IRAs can still benefit, but the tax impact may be less dramatic) (2).<\/p>\n
For this year, retirees aged 70\u00bd or older can donate up to $108,000 this way, according to the IRS (3). Married couples can each donate up to that limit if both spouses qualify. Thanks to the Secure Act 2.0, that cap now adjusts for inflation every year.<\/p>\n
The majority of Americans \u2014 91% of filers, according to the Tax Policy Center \u2014 take the standard deduction instead of itemizing (4). While some choose not to itemize because it can yield a larger deduction, others simply opt for standard deductions because they can be simpler. That means their regular charitable donations would not actually lower their taxable income.<\/p>\n
QCDs are different. There\u2019s no deduction because the money is simply excluded from income, which is \u201cbetter than a deduction,\u201d said Juan Ros, CFP and partner at Forum Financial Management (1).<\/p>\n
If you\u2019re 73 or older, you have to start taking required minimum distributions (RMDs) from your pretax retirement accounts, whether you need the cash or not. If you skip it, the IRS will hit you with a penalty.<\/p>\n
A QCD lets you donate part or all of your RMD directly to charity, fulfilling the requirement while avoiding the tax hit.<\/p>\n
\u201cFor my philanthropic clients, it\u2019s almost a no-brainer,\u201d said Jim Guarino, CFP and managing director at Baker Newman Noyes (1).<\/p>\n
That doesn\u2019t necessarily mean it\u2019s a no-brainer for you too, though. That\u2019s why it can be worth working with a qualified financial advisor, who can walk you through the process and help determine whether it\u2019s the best strategy for you \u2014 especially if you have a high net worth in retirement.<\/p>\n
With Advisor.com<\/a>, you can get matched with multiple qualified financial advisors in just minutes.<\/p>\n Just enter some basic information, including your ZIP code, and Advisor.com will match you with fiduciary advisors in your area that can help you create a plan to manage your wealth.<\/p>\n From here, you can then book a free call with no obligation to hire<\/a> to make sure they\u2019re the right fit for you.<\/p>\n Meanwhile, high-net-worth households may be interested in white-glove financial services that allow you to take advantage of a full spectrum of advisorial advice \u2014 from tax segmentation to backdoor Roth IRAs. This is where Range<\/a> can help you manage, and maximize, your wealth.<\/p>\n Once your net worth enters this ballpark, one of the biggest financial pain points can be asset under management (AUM) fees for your investments. Portfolio managers take a percentage of your managed assets\u2019 value, typically between 0.5% and 2%, of your portfolio \u2014 so their fees scale with your wealth.<\/p>\n Range offers 0% AUM fees for advisory services<\/a> and a flat-fee structure so that you can preserve more of your money. What\u2019s more, they also offer an all-in-one solution for everything from alternative asset management to taxes, informed by modern AI solutions and backed by a team of certified financial professionals.<\/p>\n And the best part? You can book a complimentary demo<\/a> to see if Range meets your comprehensive financial needs.<\/p>\n Trending: Robert Kiyosaki says this 1 asset will surge 400% in a year<\/a> \u2014 and he begs investors not to miss its \u2018explosion\u2019<\/p>\n To make a QCD, you\u2019ll need funds in an IRA \u2014 but what if you\u2019re invested in a 401(k) or another type of vehicle instead?<\/p>\n You\u2019ll have to roll over your investments into a traditional IRA. Most 401(k)s and employer plans allow transfers to IRAs, which then become QCD-eligible. Once the funds are in the IRA, you can instruct the custodian to send the donation directly to a qualified 501(c)(3) charity, which keeps the money out of your taxable income (2).<\/p>\n Keep in mind that timing matters. IRS rules generally require rollovers to be completed within 60 days to avoid penalties. Donor-advised funds and private foundations don\u2019t qualify, so double-check the charity before transferring.<\/p>\n By moving your 401(k) or other retirement savings into an IRA first, you could unlock the full tax benefits of QCDs, even if you didn\u2019t start with an eligible account.<\/p>\n Key things to remember:<\/p>\n You have to be at least 70\u00bd when the donation leaves your IRA \u2014 keep in mind SEP and SIMPLE IRAs aren\u2019t eligible (5).<\/p>\n Tell your IRA custodian to send the money directly to the charity and not to you.<\/p>\n Verify the organization is a qualified 501(c)(3), as donor-advised funds and private foundations don\u2019t count.<\/p>\n Keep all your receipts and records.<\/p>\n Federally, QCDs are excluded from income, but tax treatment can vary by state. Some states conform fully to IRS rules, while others don\u2019t. Before you move money, double-check with your state\u2019s Department of Revenue or a tax professional.<\/p>\n For retirees who want to give generously and cut their tax bill, QCDs could be a win-win. With a single move, you can satisfy RMDs, keep your income lower and support causes you care about.<\/p>\n We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines<\/a>.<\/p>\n CNBC (1<\/a>); Fidelity Charitable (2<\/a>); IRS (3<\/a>), (5<\/a>); Tax Policy Center (4<\/a>)<\/p>\n This article provides information only and should not be construed as advice. It is provided without warranty of any kind.<\/p>\n","protected":false},"excerpt":{"rendered":"Envato Moneywise and Yahoo Finance LLC may earn commission or revenue through links in the content below. 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