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Start Your Engines: It’s IRA Season!

vintage blue race car

Tis The Season

Over the past few years, donors have gotten the hang of using the Qualified Charitable Distribution to their great advantage. Charities are starting to promote it and Advisors are realizing the incredible tax benefits for their clients.

This is the time of year when many people over 70 1/2 are making decisions about how to structure their IRA Required Minimum Distributions (RMDs). Do they need the entire amount or would they rather send some or all of it to their favorite charities? The RMD deadline is December 31st for most people.

When I talk to charities about this concept, most of them are astounded that RMDs are typically five or six figures large! Furthermore, many IRA owners don’t need or want all that extra taxable income. Many people have realized that the QCD is an ideal solution to this situation.

A Few Details

Let’s go over the basic details so we are all on the same page about the QCD. First off, when we turn 70 1/2 we must begin taking distributions from our IRA or other qualified retirement account. The required distribution is determined by two basic factors 1) the value of the account, and 2) the account owner’s age. The older someone gets the larger the distributions tend to be, because the formula is designed to distribute the entire account value by the time they reach their life expectancy.

A Qualified Charitable Distribution allows an IRA owner to distribute money directly from her IRA to the charities of her choice without recognizing any income tax on that amount. She must; however, be aware of some details:

  • She is limited to $100,000 per year.
  • She must be 70 1/2 at the time of the distribution.
  • The QCD can count towards her RMD, but it doesn’t have to.
  • Other types of retirement accounts do not qualify – only IRAs.
  • The QCD does not result in an income tax deduction, but it’s also not taxable to her.

Better Than a Tax Deduction?

Good news – The QCD is better than a tax deduction!

Before this law was enacted, if we wanted to make a charitable contribution from an IRA we had to take the IRA distribution as taxable income to ourselves and then make a separate contribution to charity. The resulting charitable deduction never completely off-set that extra income because of the ripple effect it causes in our tax return.

When someone takes a distribution from an IRA (or other qualified retirement account) the entire amount is often 100% taxable at our highest ordinary income tax rate. That income increases what’s called Adjusted Gross Income or AGI.

AGI determines many things.

AGI determines how much tax we pay on Social Security Income as well as how much we pay for Medicare PremiumsThere are other effects, but we won’t go into those today.

Charitable income tax deductions DO NOT lower AGI, but a QCD can. Therefore, a deduction cannot reduce the tax on SS income or Medicare premiums, but a QCD can.

The QCD amount does not show up as taxable income on a tax return; therefore, it doesn’t increase AGI. The tax basically evaporates and doesn’t have any effect on the tax return at all. The charity doesn’t pay tax on it either, since it’s tax-exempt.

What Do We Do With This?

Charities MUST BEGIN MARKETING THE QCD TO DONORS! I cannot say this strongly enough.

  • Say it in face-to-face conversations.
  • Say it on your website.
  • Say it in e-mail messages.
  • Say it in print messages.
  • Say it to your board!
  • Say it to your volunteers!

Don’t just say it to people over 70 1/2. Everyone probably has a parent or grandparent subject to RMDs. They may just spread the word.

Charities are receiving more money than they ever imagined in the form of Qualified Charitable Distributions and YOU CAN TOO! Just make sure people know about it.

You don’t have to be an expert either. Most fundraising marketing companies will sell you customizable, off-the-shelf postcards, print text, letters, etc to inform your audiences about this. They’re cheap and you’ll make the money back with the very first QCD you receive. Trust me.

Advisors MUST BEGIN TELLING THEIR CLIENTS ABOUT THE QCD. Just think what a hero you will be if you help a client support their favorite charities in a BIG way, decrease taxable income, potentially decrease Social Security tax and Medicare premiums. You’ll get their advisor of the year award!

Ready, Set, GO!

Make some calls today to people you know who are 70 1/2 and older. See if they know about this new fangled QCD thing. If not, have a little conversation about it. See where it goes and watch the contributions roll in!

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