Is a Qualified Charitable Distribution (QCD) Right for my Client?

A qualified charitable distribution (QCD) can be a powerful way to meet your clients’ financial planning objectives and charitable giving goals while providing additional tax-related benefits.

What are QCDs and when is the right time to present them to your clients?

Our Wealth Advisor Relations Director Jason Rogers, AIF®, CWS® and Gift Planning Advisor Director Leslie S. Klein, CFP®, AEP® answer those questions and more below.

Q&A: Qualified Charitable Distributions

The San Diego Foundation (TSDF): Jason, what is a QCD?

Jason Rogers (JR): QCDs were first introduced in 2006 to help offset the required minimum distribution (RMD) income tax burden from taxpayers and to encourage charitable giving. The law allows a taxpayer over age 70 ½ to donate up to $100,000 total to one or more charities directly from a taxable individual retirement account (IRA) instead of taking his/her RMD. As a result, clients may avoid being pushed into higher income tax brackets and prevent phaseouts of other tax deductions.

TSDF: Leslie, can you talk to us about RMDs?

Leslie Klein (LK): With the Setting Every Community Up for Retirement (SECURE) Act, individuals over age 72 must take an annual RMD from their tax-advantaged retirement plans before year-end. The government updated this rule from age 70 ½ to give individuals more time to accumulate retirement savings, while ensuring income taxes get paid from tax-deferred retirement plan contributions, such as IRAs, 401(k)s and 403(b)s. To calculate the RMD, a formula based on life expectancy is applied to the balance of your accumulated retirement plans.

In 2020, due to COVID-19, the Coronavirus Aid, Relief, and Economic Security (CARES) Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs.

TSDF: Do QCDs count toward a client’s RMD for the year?

LK: If your client has to take an RMD but doesn’t want or need the money, a QCD up to $100,000 can be an effective solution by transferring the minimum required amount out of the IRA directly to charity. Your client will avoid paying income tax on the distributions, as is required if you take the distribution directly. A 50 percent excise tax is the penalty for not taking your RMD.

A QCD can be a good strategy during a year when all or part of a traditional IRA is being converted to a Roth IRA. In the year of the conversion, you still are required to take your RMD for the year, regardless of when the conversion is done during the year. You won’t be able to convert the RMD amount. Without the QCD, you’d have to include the RMD in gross income along with the converted amount.

The alternative is to make a QCD with the RMD amount. That keeps the RMD amount out of your gross income.

TSDF: How do QCDs impact a client’s taxable income?

JR: QCDs can be used to help keep adjusted gross income (AGI) and taxable income within a desired range, as income from a charitable distribution “bypasses” your client’s Form 1040. That is, your client will still report the full amount of the 1099 income on Form 1040 on the line for IRA distributions but will enter “QCD” next to the amount donated, which may net zero as the taxable amount if the full distribution was a QCD. This can help prevent your client’s income from reaching the thresholds for the net investment income tax and from disqualifying for other tax breaks.

TSDF: How would a financial advisor know if a QCD is right for a client?

JR: QCDs provide many potential benefits to clients. They may be suitable giving strategies for clients who:

• Are required to take an RMD from an IRA, but don’t need the funds and want to give them to charity
• Have fewer itemized deductions, including their potential IRA RMD gift, than the standard deduction, so that they wouldn’t be able to deduct the RMD gift
• Would like to reduce the balance in an IRA to lower future RMDs.
• Would like to make a larger tax-deductible charitable gift than they could if they simply donated cash or other assets. The value of charitable gifts that can be deducted from  taxable income usually ranges from 20 to 60 percent of the donor’s adjusted gross income (AGI), which can be carried forward against AGI for another five years. This AGI-based deduction limit does not apply to QCDs, allowing donors to make larger gifts that are income tax-free.

TSDF: Can a client contribute a QCD to a donor-advised fund at a community foundation?

LK: A QCD is a great opportunity for clients to support their community foundation through scholarships, program funds or donor designated funds, including The San Diego Foundation’s Community Scholars Initiative, Climate Initiative, Black Community Investment Fund or Early Childhood Initiative.

Your Charitable Partner

San Diegans turn to their trusted financial advisors when first considering philanthropy. We act as the charitable partner/advisor of your professional team, supporting your clients through the giving process as you retain complete control of your client relationships.

For more than 45 years, we have worked with a large network of estate planning attorneys, wealth advisors, accountants, and other philanthropic advisors to help clients accomplish their financial planning objectives and charitable giving goals, while maximizing their tax deductions.