People owning IRA contracts that are over age 70 ½ have a unique opportunity to complete a Qualified Charitable Distribution (QCD). This is becoming more and more popular as a charitable giving option. Some planners refer to this technique as an “IRA charitable rollover”. In recent years the QCD was made “permanent” so now donors can plan accordingly.
Some basic rules to be aware of:
*The IRA holder must be 70 ½ or older on the date of the gift. Notice that the rule does not say “the year in which the IRA holder turns 70 ½” Big difference, so plan accordingly!
For example: Mark has a birthday June 21. He will be turning 70 this year. He is not 70 ½ until Jan 21 of the following year. He would not be able to complete a QCD until Jan 21. If Mark’s birthday would have been March 21, he would be 70 ½ on Sept 21 and would be able to complete QCD this year on or after Sept 21.
*Up to $100,000 per year can be transferred by way of QCD
*Notice the rule says IRA not 401(k)
For example: Susan, age 71, had worked at her career as a Banker for over 30 years and has accumulated a nice sum in her 401K plan. She has learned about the QCD and thinks it might be a way for her to donate to the Local School District Foundation and create a scholarship for students going to college for a business degree. Susan would need to first do a rollover of her 401K to an IRA. Once the money is in an IRA account she would be able to request a QCD to the school district foundation. She would then work with the foundation to establish her scholarship fund.
*The amount transfer by QCD can be used to offset any Required Minimum Distribution (RMD) that the IRA holder would have had to completed in the year of the gift.
For example: Bob has a Required Minimum Distribution of $8000 from his IRA this year. He decides he wants to have $5000 transferred by way of QCD to his local hospital foundation. Bob would still need to take an additional withdrawal from the IRA of $3000 to satisfy the RMD
*The amount transferred by QCD is not included in the donor’s Adjusted Gross Income (AGI). The Institution holding the IRA will send tax document to the donor showing that the money was withdrawn from the IRA account. That tax document is not coded any different that a normal distribution. However, the donor will also get a letter from the charity indicating that they received the gift of the IRA by way of QCD. The donor should take caution to match these two documents up and deliver to accountant so that the person preparing the tax return knows of the QCD! Please do not assume your accountant will know that the QCD occurred! It is critical in today’s tax environment to not claim this QCD transfer as taxable income as it can lead to unnecessary inclusion in the AGI and lead to higher income tax, social security tax and Medicare premium.
For example: Helen completed a gift to her local church by way of QCD this year instead of writing out a check each month and placing in the collection plate. Helen receives a 1099 from her investment company in Jan of the following year. The 1099 looks like she took a distribution and is coded as such. However, there is a notation that says, “taxable amount not determined”. Helen puts that in her tax file to take to her accountant. Helen also received a letter from her church indicating that they had received a donation from her by way of QCD. Helen should put this with the 1099 from the investment company, so her tax preparer knows that the withdrawal from the IRA should not be included in her taxable income.
A more advanced method of leveraging the QCD is inclusion of Life Insurance planning. Life insurance can be used if the donor does not want to direct the QCD outright to the charity. In this method the QCD can be directed to a Donor NON-Advised Fund which the donor had previously established with a foundation. The donor would then transfer the ownership of a life policy to the same Foundation. The QCD from the IRA directed to the foundation would then be used to pay the premium on the life policy. The advantage is that the life policy will be a future gift that is multiplied in value.
For example: Roberta supports her favorite charities with gifts from her income. Roberta is turning 70 ½ and knows that she will have a RMD from her IRA. She does not need this RMD for income. She is not excited about paying taxes on the RMD either! She is not interested in donating more to the charities currently as she feels she gives generously from her income. She likes the idea of a future gift. Roberta chooses to do a QCD to a Donor Non-Advised fund and transfers a life insurance policy to that same foundation. Each year Roberta completes a QCD to pay the annual premium on that life policy. When Roberta passes away the life policy death benefit is paid out to the foundation. This will support the charity for years to come by way of endowment. Roberta has the peace of mind knowing that her life insurance gift will create an income to the charity. Roberta thinks of it as replacing the gift that she is no longer donating from her income every year because she has passed away.