Forced to dip into retirement funds because of age? Consider charitable donations from IRA

Q. I will be 70½ next year and forced to take funds from my retirement account. I understand I can make charitable donations from that account but how exactly is that done? — Ted in Indialantic

A. Ted, the day on which you turn 70½ you become eligible to make Qualified Charitable Distributions (QCD) directly from an IRA. Retirement plans such as 401(k)s and 403(b)s are not eligible. So, if what I am about to explain about QCD appeals to you, and you do not currently have an IRA or the IRA does not have as much money as you would like to donate, you should look at a rollover of funds from your retirement account to an IRA.

Qualified Charitable Distributions are a great way to gift to charity and are superior to simply writing  checks from a bank account. Once old enough, each taxpayer can make donations from any number of their IRAs to an unlimited number of qualified charities, up to a total of $100,000 per year. With some forethought, an eligible couple can make up to $200,000 per year of such donations.

The charities must be 501(c)(3) public charities, eligible to receive tax-deductible contributions. Most charities you have heard of, and many smaller ones, are qualified charities. Some charities that are not qualified to receive QCDs would be private foundations, supporting organizations: i.e., charities carrying out exempt purposes by supporting other exempt organizations, and donor-advised funds.

In most cases, distributions from an IRA result in taxable income. However, if you make a QCD, the donated amount is fully excluded from your gross income on your tax return. Despite not being taxable, the donation will count toward your Required Minimum Distributions (RMD) for the year in which the donation is made. By the way, Ted, you will not be subject to RMD next year. They are not required until the year you turn 72.

The complete exclusion from income makes QCD very attractive to households that are not able to itemize because non-itemizers do not get a tax benefit from charitable donations until the total of their expenses eligible for a deduction on Schedule A of their tax return exceeds the standard deduction. Itemizers can benefit from QCDs too, particularly if they have deductions that are reduced by a higher gross income, such as medical expenses, or their gross income would trigger additional taxes.  

To make a QCD, you request a distribution form from the company holding your IRA. Most IRA providers will give you the option to have the check mailed directly to the charity or to you so that you can present the check in a more personal manner. Regardless of where it is mailed, the check should be made payable to the charity, not you.

Alternatively, many IRA providers will also provide a checkbook on the IRA for QCD purposes. Just make sure the charity cashes the check before Dec. 31, so the donation is properly included on the 1099-R the provider will issue. 

Come tax time, the accounting looks like this. Say in 2022 you distribute from your IRA $40,000 to yourself and $10,000 to your church through a QCD. In early 2023, you will receive a 1009-R for $50,000. This amount is included on line 4a “IRA distributions” of your Form 1040. On line 4b “taxable amount” you would enter just $40,000. Most tax preparers place the letters “QCD” in the margin to signal to the IRS why the $10,000 is not taxable.

Dan Moisand, CFP®, is a past national president of the Financial Planning Association, has been featured as one of America’s top financial planners by at least 10 financial planning publications. He can be reached at www.moisandfitzgerald.com or 321-253-5400, ext. 101.

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