If you are age 70 ½ or older, IRS rules require you to take a required minimum distribution each year from your tax-deferred retirement accounts. This additional taxable income may push you into a higher tax bracket and reduce your eligibility for certain tax credits and deductions. To eliminate or reduce the impact of required minimum distribution income, you may want to consider making a qualified charitable distribution.
A qualified charitable distribution is a direct transfer of funds from your IRA to a qualified charity. Amounts distributed as a qualified charitable distribution may be counted toward satisfying your required minimum distribution for the year and be excluded from your taxable income.
An eligible qualified charitable distribution must meet the following conditions:
- Be at least 70 ½
- The funds must come out of your IRA by your required minimum distribution deadline – typically December 31
- Funds must be transferred directly from your IRA to one or more qualified charities
- Qualified charitable distributions are limited to the amount that would otherwise be taxed as ordinary income
- The maximum annual distribution amount qualifying a qualified charitable distribution is $100,000. However, if you are a joint tax filer, both you and your spouse may make a $100,000 qualified charitable distribution from your own IRAs.
Qualified Charitable Distributions & Required Minimum Distributions
You are allowed to make a qualified charitable distribution in excess of your required minimum distribution amount, up to $100,000. However, any amount donated above your required minimum distribution does not count toward satisfying a future year’s required minimum distribution. If your qualified charitable distribution does not fulfill your required minimum distribution for the year, you will need to withdraw additional funds to satisfy your required minimum distribution.
Example: You take a required minimum distribution in February, and then in November decide you want to do a qualified charitable distribution. You cannot retroactively deem the February distribution to be a qualified charitable distribution. You may still make the qualified charitable distribution and exclude this distribution from taxable income, but you will still need to include the February distribution as income.
If you take a regular withdrawal from an IRA and use it to make a charitable contribution, you still need to include this required minimum distribution in your taxable income. In order to meet the requirements of a qualified charitable distribution, it must be made directly to the charitable organization. A distribution in the form of a check must be made payable to the organization.
Qualified Charitable Distributions & Charities
For purposes of making a qualified charitable distribution, a eligible charity is any 501(c)(3) organization. This DOES NOT include private foundations or donor-advised funds. You are not allowed to receive any benefit in return for your qualified charitable distribution.
Example: If your donation covers tickets to a gala, your gift would not qualify as a qualified charitable distribution.
The charitable organization must cash your check before year-end for the qualified charitable distribution to satisfy your required minimum distribution. If you are planning to use a qualified charitable distribution as part of your year-end giving strategy, ensure you allow plenty of time for the charity to cash the check. Make certain you receive acknowledgement of the donation because you will need this to claim a deduction for a regular charitable contribution.
Qualified Charitable Distributions & Brokerage Accounts
Brokerage firms process each qualified charitable distributions differently. Contact your broker to learn exactly how to make a qualified charitable distribution from your account. The default option on many IRA distributions is to have tax withheld since most distributions are considered taxable income. If you are making a qualified charitable distribution, confirm with your broker you are not automatically having tax withheld, because the distribution is not taxable.
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