A series of strategies for tax-wise investors. Table of Contents.
501(c)(3)
Associated Press
“Qualified charitable distribution” is tax jargon for money you send directly to a charity from your pretax retirement account. This beats taking the money into your bank account and then writing a check to the charity.
With the QCD, you keep the cash-out entirely absent from your tax return. That makes the donation effectively tax-deductible, which it wouldn’t otherwise have been if you claim the standard deduction. That is, if you withdraw $10,000 from your IRA and then mail a check to the Salvation Army, you add $10,000 to your adjusted gross income and may or may not have a corresponding deduction.
Even if you do itemize, so that your taxable income is unchanged (+$10,000 from the withdrawal, -$10,000 from the charity deduction), you have inflated your adjusted gross income. That can cause serious peripheral damage, such as exposing more investment income to the 3.8% surtax and boosting your Medicare premiums.
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You are eligible for a QCD the day (not the beginning of the year) when you turn 70-1/2. You are limited to $100,000 a year of these donations. Also, you can’t direct a QCD to a donor-advised fund.
Wait a bit longer, until the beginning of the year you turn 72, and you get a further benefit from a QCD. It counts against mandatory withdrawals, which must begin that year. Thus, it allows more of the account to continue tax-free compounding.
Note that the retirement account used for a QCD is a pretax IRA. You would never, ever send Roth money directly from the custodian to a charity.