#13 | Qualified Charitable Distributions or QCDs

For IRA owners that are charitably inclined, a Qualified Charitable Distribution, or QCD, can be an incredibly useful tool.

Today, Bruce Hosler of Hosler Wealth Management explains the rules around QCD’s, including who is eligible to make them, which organizations are eligible to receive them, which accounts can be used, and some very common pitfalls to avoid.

The IRA owner (or beneficiary in the case of an inherited IRA) must be at least 70 1/2 years old, with a limit of $100,000 per year per taxpayer. Also, QCDs are not available in the instances of SEP’s, simple IRAs, and qualified plans like 401k’s and 403b’s.

A qualified charitable distribution can be counted as “above the line” on your taxes, meaning it’s not part of your income. Bruce explains how this can be used to avoid a jump in tax brackets, which can sometimes trigger taxes on social security income.

When making a QCD, it’s important to make it during the calendar year you are claiming it, make the check payable to the charity, and be sure to go over all details with your financial advisor and tax professional.  This can be a great tool if used correctly, but can lead to massive headaches if not done right.

For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management.

Call the Prescott office at (928) 778-7666 or our Scottsdale office at (480) 994-7342.

To listen to more Protecting & Preserving Wealth podcast episodes, click here.

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Bruce Hosler is the founder and principal of Hosler Wealth Management, LLC., which has offices in Prescott and Scottsdale, Arizona. As an Enrolled Agent, CERTIFIED FINANCIAL PLANNER™ professional, and Certified Private Wealth Advisor (CPWA®), Bruce brings a multifaceted approach to advanced financial and tax planning. He is recognized as a prominent financial professional with over 27 years of experience and a seven-time consecutive *Forbes Best-In-State Wealth Advisor in Arizona. Bruce recently authored the book MOVING TO TAX-FREE™ Strategies For Creating Tax-Free Retirement Income And Tax-Free Lifetime Legacy Income For Your Children. www.movingtotaxfree.com.

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Jon “Jag” Gay: Welcome to episode 13 of Protecting and Preserving Wealth. I am Jon Jag Gay, joined as always by Bruce Hosler from Hosler Wealth Management. Bruce good to be back with you.

Bruce Hosler: Jon, good morning. It’s a fantastic day in America.

Jon: It is, and it’s gonna be a fantastic day for our listeners who aren’t familiar with today’s topic, when they learn about it, very valuable tool, the qualified charitable distribution, also known as the Q CD.

Let’s start at the top. Bruce, what is it?

Bruce: So, Jon, we’re talking about qualified charitable distributions today, and a qualified charitable distribution is a distribution that’s taken from an IRA that is made payable to a qualified charity on behalf of an IRA owner. It can be used to fulfill the requirements of a required minimum distribution if the owner has a required minimum distribution.

Jon: Okay, so what are the primary benefits of this qualified charitable distribution? Why would somebody want to make the distribution as opposed to maybe taking the money for themselves?

Bruce: We’re talking about IRA owners that are a little bit different. These are people that are charitably inclined. You know the people that I’m talking about.

They’re committed to making charitable donations each year, possibly to their church, their college, alma mater.

Jon: Mm-hmm.

Bruce: These people have an ongoing social obligation, if you will, or a commit. To make donations to their church or their college every year. Maybe they’re a college graduate that wants to give back to their alma mater. In various programs at the school that they wanna support.

Jon: I can tell you I like to support a couple of programs at my alma mater, like the radio station I worked at as opposed to when they get the freshman doing the work-study program calling me up. Um, hello, Mr. Gay. My name is Joseph. I am a freshman and I would like to know if you would like to donate money to Syracuse University.

No, I, I appreciate what you’re trying to do here, kid, but thanks, but no thanks.

Bruce: Right.

Jon: Can anyone with an IRA choose to make a qualified charitable distribution, a qcd, or are there limitations to it, Bruce?

Bruce: Certainly there are a number of limitations and the first one that comes to mind that’s really big, is that the IRA owner or it’s an inherited IRA where they’re the beneficiary of an inherited ira. They have to have already achieved age 70 and a half in order to make a QCD.

Jon: So, it’s the same age as those required minimum distributions, right?

Bruce: No, because the required minimum distribution age has now been raised to 72.

So, somebody that’s only 70 and a half and does not have a required minimum distribution can still make A QCD, but they don’t have an RMD requirement yet.

Jon: Okay. That’s important to notice. I think I said that out of habit now that I think about it. The RMD age used to be

Bruce: 70 and a half. It used to be, but it’s been changed to 72 now.

Jon: So the RMD age went up. The QCD age stayed the same. That’s important to know.

Bruce: Exactly. Exactly.

Jon: So Bruce, what about the amount that someone can donate from their IRA to a QCD? Is there a limitation on the amount or could they give away the whole thing in one year?

Bruce: So, there’s an annual maximum qc d donation limitation of $100,000 per year per taxpayer.

So, if you’re a married, couple, you can each make a QCD of a hundred thousand each. So as a couple you could actually give away as much as 200,000 per year.

Jon: Okay, what other limitations are there?

Bruce: So, the account owners that don’t own IRAs, but they have similar accounts like a SEP IRA or a simple ira, they cannot make a QCD.

Jon: Hmm.

Bruce: Also, the owners of qualified retirement plans like a 401K or a 403b, those plans are not qualified to make QCDs.

Jon: That’s really important to note. I’m glad you said that. Sorry, let’s go to the other side of it, Bruce. What about the charitable organizations that receive the donation? Are there any special requirements for them to qualify to be able to receive the proceeds of a QCD?

Bruce: Yeah, so, not every charity will qualify. What we’re looking for is charities that are eligible to receive a tax deductible contribution. Now, some charities do not qualify. These include private foundations. Donor advised funds, so the tax payers need to make sure that their charity is a qualified charity to receive tax deductible donations.

And, they’re not a private foundation or donor advice fund. For the most part, if the charity is organized as a 501c3, then generally you’re, you’re in pretty good shape there.

Jon: That makes sense. So, I think I know what our next question will be for the listeners, uh, checking this out today. How does this work tax-wise for the IRA owner making the donation?

The QCD donor gets to take a charitable tax deduction on their schedule A itemized deductions. Is that how it works?

Bruce: Actually, it’s even better than that Jon. The donor receives not a tax deduction, so they do not get to take a tax deduction on their Schedule A. They get to exclude the income, the amount of the QCD from their income on their 1040.

So, this helps them keep their adjusted gross income lower, helping them avoid triggering income threshold amounts that would raise them into higher tax brackets.

Jon: Ah.

Bruce: Perhaps keeping their social security from becoming taxable. And perhaps maybe keeping them from subjecting their Medicare premium to surcharges because their income was too high.

So it helps them keep their income lower.

Jon: That is really huge, that it’s above the line that you’re taking that off of your income and not a deduction later on. And we talked about those thresholds for social security in a previous episode. If you wanna go back and check that out. What about the timing Bruce?

Is there a limitation on when you can make that QCD donation?

Bruce: Yes, and this is very important. QCDs are calendar year transactions. That means January through December, they must be processed before the end of the calendar year. You cannot make a QCD donation after the first of the year and then try to apply it back to the previous year.

Jon: Mm.

Bruce: This sometimes throws taxpayers off because they think like an IRA. Oh, well I have until April 15th to make the contribution. That does not work with a QCD.

Jon: That is a really important point of differentiation. Are there any other mistakes that are easy to make when you’re trying to make one of these QCDs?

Bruce: Boy, the big one is the distribution check.

Jon: Mm.

Bruce: This check has to be made payable to the charity and not to the IRA owner. So, the owners have the check made payable to the charity. They can have it mailed to their home so they can hand-deliver it in person and receive, you know, accolades or credit for handing over the check, but the check always has to be made payable to the charity.

You know, the second thing is the IRA custodians are gonna generate a regular 1099R for the distribution from the IRA. So, there’s no special code for a QCD on a 1099R. So it’s the responsibility of the IRA owner to let their tax professional know that they made a QCD donation and the amount of the donation and the tax professional has to enter this on the tax return software in a special way so it’s not included in income.

Otherwise, this is easily missed and the IRA owner does not get the benefit of the QCD.

Jon: I wanna go back to those two important points you made there, Bruce. So, making sure that the check is made out to the charity. It’s almost like if you do a 401k rollover and it needs to be made out to where it’s going, not just to

Bruce: the new IRA custodian.

It’s exactly the same, it goes to the charity.

Jon: Then the second point that you made is, when the money comes out of an IRA, it generates that 1099R, but there’s no specific designation, so you have to make sure when your taxes are filed, that it’s properly, uh, marked and filed and noted so that you do get that tax benefit and the IRS doesn’t think you just took that money out of the IRA to spend it.

Bruce: That’s right. If the CPA or the tax professional, EA, whatever, just gets the regular 1099R, they have no way of knowing that that was a QCD. The IRA owner has to let them know that, and the IRA custodian does not put that on the 1099R, so, it’s a boondoggle unless the tax professional knows about it.

Jon: Okay, what about the IRA owner that has a check writing ability on that IRA account? Is it easier just to write the check from the IRA account?

Bruce: Oh, this is a potential nightmare and it can create a lot of problems.

Jon: So, I’m gonna guess the answer to that is, “No.” okay.

Bruce: The answer is “No.” We don’t want to do that because the IRA custodian does not report the distribution to the charity until the charity cashes the check.

What if the charity just holds onto the check? Delays it, loses it, whatever. The donation may never be recorded in the right year, and you’ve totally blown it.

Jon: Same thing, the IRS thinks you’ve taken out that money for yourself. They don’t realize that money has gone to the charity.

Bruce: Correct.

Jon: So, I understood that the QCD could be used to satisfy the required minimum distribution, uh, requirement again for those over 72 to come back to what we were talking about earlier.

Is that part of it true that you can use it for your rm?

Bruce: Yes, and that is one of the main reasons that people consider making a QCD donation. They don’t necessarily need or want the RMD, but they wanna fulfill that, so, they feel the obligation socially to make a charitable donation. So, they just use part of their RMD, if you will, the QCD, and make that donation to their church or their charity, and it fulfills that RMD requirement.

Jon: I like that because the idea is you’re legally required to take that money out. If you’re in a position where you really don’t need that money and you’re taking your money from other sources of income, why not give it to somebody who’s gonna be in more need than you?

Bruce: So, that’s exactly right. And it’s a big benefit to those that have RMDs.

They love this QCD when we talk to ’em about it.

Jon: All right, I’m gonna throw a curve ball here, Bruce. If the IRA owner wants to make a Roth conversion during the year, how does the QCD affect that?

Bruce: Well, this becomes very complex if the IRA owner has an RMD requirement. If they’re 72, or perhaps it’s an inherited IRA and they have to take one out every year.

The first distribution in the calendar year is counted toward the RMD. So, if the IRA owner wants to make Roth conversions, the RMDs for the full year need to be distributed before, and let me underline this before a Roth conversion is made. So, we’ve started to help our clients to change the time of year that they make the RMDs and their QCDs from their IRAs.

We recommend they take their RMDs and their QCD donations in the first month or two of the calendar year, and by getting those outta the way early in the year, the client is then freed up to make a Roth conversion, anytime during the year when the market’s down, they can buy in low on that Roth conversion and do it later in the year.

Jon: This really speaks to the importance of doing things in the right order and all the tax implications of that and all the net worth implications as well. You take off that RMD to satisfy that first, and then you can do the IRA when it makes the most sense in terms of the market and your individual circumstances.

Bruce: The Roth conversion. Yes, absolutely.

Jon: Got it. So again, just to underscore this Bruce, you want clients making that IRA RMD distribution and QCD donation early, like January, February of each year?

Bruce: That’s right. We want to get those RMDs out of the way. So, the client’s free to make the Roth conversion with some of the balance of the IRA account, helping the client move their IRA to the tax-free Roth is a beautiful thing, but we gotta get that QCD and that RMD out of the way first.

Jon: So, I’m gonna go out on a limb as we start to wrap up here, Bruce and say that, I’m guessing you’re a fan of these qualified charitable distributions.

Bruce: Oh, I am a big fan. Think about it. The IRA owner received a tax deduction for the contribution on the way in, and then the IRA grows for years tax-deferred.

Then when the clients required to have to start taking out required minimum distributions and adding that to income, instead they get to make a charitable donation with those funds and they don’t have to pay any tax or recognize any income. So, here we go. A tax deduction on the way in, tax-deferred growth during the life, and then it comes out tax-free for the owner, and they get to make a charitable donation that’s tax-free to the charity.

This is a huge win, win, win.

Jon: It’s like win, win, win, win, win – wins all-around.

Bruce: Absolutely.

Jon: It sounds like it might be a great option for many of our listeners.

Bruce: It’s a great option for many of our listeners and if any of them have questions about creating the correct QCD, reach out to us at the office in Prescott, (928) 778-7666 or in Scottsdale, you can reach us at (480) 994-7342.

Jon: And the website is https://hoslerwm.com. We’ll have all the links and phone numbers in our show notes. A really valuable tool for our listeners to know about today, Bruce. Thanks for your time. We’ll talk again in a couple weeks.

Bruce: Thanks, Jon.

Jon: Securities and advisory services offered through Commonwealth Financial Network® member FINRA/SIPC a registered investment advisor.

Forward looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast does not monitored for comments and any comments should be given directly to the office at the content information specified. Any tax advice contained in this communication, including any attachments, is not intended or written to be used and cannot be used for the purpose of 1) avoiding federal or state tax penalties, or 2) promoting marketing or recommending to another party, any transaction or matter addressed herein.

The accuracy, completeness, and timeliness of the information contained in this podcast cannot be guaranteed. Accordingly, Hosler Wealth Management, LLC does not warranty, guarantee or make any representations or assume any liability with regard to financial results based on the use of the information in this podcast.

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