Black Walnut Wealth Management occasionally provides content to Traverse City Business News and other media outlets. This article ran in the December 2022 issue of the Traverse City Business News and can be read in its entirety below.
If you’re like many of our clients, you want to secure a comfortable retirement and give back to the community around you. There are many ways to give back during retirement, but one way is to donate your required minimum distributions (RMDs) directly to a charity.
Let’s look at some benefits of donating your RMDs and why you might consider this charitable giving option.
Benefits of Making a Qualified Charitable Distribution (QCD)
While removing yourself as a middleman saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. If the distribution is donated directly to the nonprofit without you collecting it first and then donating it, you’ll save a lot of money on taxes.
When you make a QCD, it is excluded from your taxable income because the amount 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.
Are You Eligible to Make a Qualified Charitable Distribution?
Not all retirement accounts are eligible to use the funds as a QCD. The funds need to be in a traditional IRA, rollover, inherited, inactive SEP, or inactive SIMPLE plan to be eligible. A SEP or SIMPLE plan is considered inactive if no employer contribution was made during the plan year ending 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 to receive donations.
- 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.
Is Your Charity Eligible to Receive a Qualified Charitable Distribution?
After establishing your eligibility, you need to ensure that your charity is eligible to receive a QCD. It must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.
On top of that, certain types of organizations are not eligible to receive QCDs. They are:
- Private foundations
- Supporting organizations (charities that only exist to help 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. Therefore, it is critical to ensure your accountant is aware of your QCDs. If they are unaware, you may miss out on substantial tax benefits! 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. You need the same acknowledgment of the donation you would need if you claimed it as a deduction. Keep this in your records to document that the QCD was qualified.
Plan for Your Retirement Income
Qualified charitable distributions are a tax-efficient way to take advantage of your RMDs and give back to a charity that’s near and dear to your heart. There are some specific rules and requirements to consider, so it’s always best to run your distribution plan by a qualified professional.
Eric Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management, a financial advisory firm providing financial counsel and fiduciary investment services to individuals, families, and private foundations throughout the Traverse City and Northern Michigan region. He is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Retirement Planning Counselor℠ with 25 years of experience. He also has a bachelor’s degree in finance from Hillsdale College. Braund is passionate about offering services rooted in hard facts and sound reasoning combined with meaningful, long-term relationships so that his clients can experience less stress and have more time and energy to invest in what they love.
Braund is a Northern Michigan native who truly enjoys all the area offers, including hiking, biking, swimming, skiing, volleyball, and boating. He loves spending time with his family — his wife, Jodi, and his two children — and maintaining a balanced life. To learn more about Eric Braund, connect with him on LinkedIn.
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