You may have heard the term QCD, but what is a QCD? Are you charitably minded? Are you over the age of 70 ½? Do you have money in tax-deferred accounts such as IRAs?
What is a QCD?
If that is you, then you may want to entertain the idea of a qualified charitable distribution, also known as QCD for short. QCD has become even more beneficial with the new tax law since many middle-class Americans will now be on the standard deduction and won’t be able to deduct their charitable contributions. However, the QCD rules can help us benefit by giving money to charity while also allowing us to cover our required minimum distribution.
What is the required minimum distribution or RMD?
The required minimum distribution begins in the year we turn 70 ½. This is a way for Uncle Sam to force us to start drawing money out of our tax-deferred accounts. The required minimum distribution that we must take fluctuates each year, based upon its calculation. This calculation is tied to your account balance year to year, along with a factor given to us by the Uniform Lifetime Table published by the IRS.
If we want to look at rough numbers, let’s say for example you have $100,000 in an IRA account and you are now turning 70 ½. Therefore, you must take a required minimum distribution even if you do not need money out of your IRA account. For most people, dependent upon your factor, roughly 3.65% will be the amount they are required to take.
Going back the $100,000 IRA, we may have to receive approximately $3,650 this year. The reason this is important is that if you do not take that distribution, a 50% penalty of the $3,650 can be assessed from the IRS. So, if you do not receive your RMD, the IRS can then come back to you and say, “Oh by the way you now owe us a penalty amount of $1,825.” That’s pretty steep. Obviously, that’s something that you don’t want to mess with.
Now with the new tax laws and for those that love giving to charity, they may not be getting all their tax benefits because they’re unable to itemize. That’s where the QCD becomes very beneficial, but there are some rules around the QCD.
Rule #1 – You must be at the age of 70 ½ or older. For example, if we turn 70 ½ in June of 2020, we cannot utilize the QCD in January of 2020. We must wait until we surpass the age of 70 ½.
Rule #2 – The money must go directly from the custodian of your tax-deferred account to your charity. Your charity must also be classified as a 501c3 organization to qualify.
Rule #3 – There is a limit to how much we can give, which is $100,000 per year.
Rule #4 – Be sure to keep all documentation for your tax professional. You will need to get receipts of all donations. Your 1099 will not show that your distribution was for a QCD.
Ultimately the question is, why is this beneficial to me? This could be beneficial if you like to give to your church or your charity where in the past you have given cash. You’ve now surpassed the age of 70 ½, and you can give that money directly from your tax-deferred account. It satisfies requirements for your RMD per IRS guidelines, and that distribution won’t be counted as income for your taxes. Depending on your situation, lowering your taxable income may add even more benefits. By reducing your income, you may be able to lower the amount of your Social Security becoming taxable. It may also help you stay and lower your Medicare premiums. This is a strategy that could lend multiple benefits. It is crucial that you are working with a professional who clearly understands the complexity of the QCD.
These are all things to consider in your overall distribution plan that you need to be discussing with your advisor and tax professional, to see if they would benefit you.
Our financial planners and CPAs work together to develop an RMD strategy specifically tailored to your plan. Our goal is to give you clarity, confidence, and control over your financial life in retirement. So, let’s chat! Give us a call at 913-393-1000 or fill out the form below to start your journey to and through retirement.
Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.