At Wilkinson Wealth Management, our commitment to community engagement and generous living is a top priority. If this resonates with you, then you share a common ethos with our clients. You understand that life extends far beyond your individual sphere, and you desire to leave a meaningful impact on the world, contributing positively whenever and however possible. You appreciate the opportunities you’ve been given and strive to pay it forward in a way that truly matters.
Your charitable giving serves as a reflection of this purpose, and our job is to help you to execute it with wisdom and efficiency. Every dollar we can help you save on taxes becomes an additional resource that can be channeled toward creating a better world.
As the cornerstone of retirement planning cash flow, required minimum distributions (RMDs) offer a unique avenue to support this mission. Instead of placing these funds into your personal bank account, consider shifting your RMDs directly to a charitable cause through what is known as a qualified charitable distribution (QCD).
Pros and Cons of a Qualified Charitable Distribution
Qualified charitable distributions (QCDs) have gained popularity among people aged 70½ or older as a strategy to support charitable causes while optimizing their financial situation. However, like any financial strategy, QCDs come with their own set of pros and cons that must be carefully considered.
Pros of QCDs
Reduction in taxable income: One of the primary benefits of a QCD is that it can reduce your adjusted gross income. By lowering your taxable income, you may find yourself in a lower tax bracket, ultimately decreasing the amount you owe in taxes.
Avoidance of penalty: If you’re required to take a minimum distribution from your retirement accounts and fail to do so, you may face a hefty 25% penalty. Utilizing QCDs allows you to meet this requirement without penalty.
No need to itemize deductions: Unlike traditional charitable donations, you don’t need to itemize deductions on your tax return to deduct a QCD from your taxable income. This simplifies the tax process for many people.
Cons of QCDs
Eligible charities: QCDs must go to qualified charities. It’s essential to be sure that the organization you wish to support meets the necessary criteria.
Direct transfers only: To qualify as a QCD, the donation must be made directly from your individual retirement account (IRA) to the charity through your trustee. You cannot withdraw the funds and then donate them directly.
Annual limit: There is an annual limit on QCDs, which is currently set at $100,000 (set to change in 2024). Keep in mind that this limit could affect the total amount you can contribute.
Not claimable as itemized deductions:While QCDs provide tax benefits, they cannot be claimed as itemized charitable deductions on your tax return. This means you can’t “double-dip” and benefit from both tax deductions and reduced taxable income.
Another benefit of taking qualified charitable distributions is that they count toward your annual RMD—the minimum amount that you must withdraw from many IRAs (except Roth IRAs) each year. RMDs start when you reach age 73.
Keep in mind that one problem with taking RMDs from traditional IRAs (and 401(k)s as well) is that they increase your taxable income. Depending on your situation, they can push you into a higher tax bracket. Using qualified charitable distributions could fulfill all or part of your RMD requirement without increasing your taxable income. The maximum annual amount you can take as QCDs is $100,000. (Note that 401(k)s and other qualified plans also have RMD requirements, but you cannot take a QCD from those savings vehicles.)
One important note: Certain charities—including donor-advised funds, private foundations, and supporting organizations—aren’t eligible to receive QCDs. Roth IRAs may be used for QCDs, but there’s no tax advantage to doing this because Roth IRAs are designed to provide tax-free income in the future.
New QCD Rules
The recent changes of the SECURE 2.0 Act have brought about big improvements to qualified charitable distributions. The previous $100,000 annual limit on QCDs will now be indexed for inflation, a change set to take effect in 2024. This indexing feature opens up the possibility for people to make larger contributions through QCDs over time, adjusting to the changing economic landscape.
Also starting in 2023, you can include a one-time gift of up to $50,000 to a split-interest equity, such as a charitable remainder trust (CRT) or charitable gift annuity (CGA). Like the annual limit, this $50,000 limit will also be indexed for inflation starting in 2024. These updates in QCD regulations offer an increased level of flexibility and potential for larger contributions to charitable causes. It empowers donors to have a bigger impact on the charitable organizations they support, helping them realize their philanthropic goals.
Team Up With a Trusted Professional
We recognize that your commitment to charitable giving is a high value for you. Since you’re committed to giving, why not explore the most tax-efficient way to do so? Qualified charitable distributions present an excellent opportunity for people who are required to take minimum distributions from their retirement accounts.
It’s important to note that there are specific rules and criteria that must be met to make sure your distributions qualify for tax exemption. To navigate the process correctly and efficiently, it’s wise to consider collaborating with an experienced financial professional. If you’re interested in understanding more about QCDs, Wilkinson Wealth Management is here to help. If you’re ready to team up with a financial planner dedicated to simplifying your finances and guiding you to a stable financial future, please schedule an introductory phone call with us. Reach out to us at 434-202-2521 or use our Contact Us page to schedule an appointment.
Susan Wilkinson is founder, president, and financial advisor at Wilkinson Wealth Management, a financial services firm in Charlottesville, Virginia, providing customized financial planning and strategies with a personal approach. With over 25 years of experience, she has a passion to come alongside her clients to help them fulfill their dreams and grow their wealth so they can be financially independent. Susan is known for listening to her clients, digging deep into their values, concerns, needs, and goals so she can build a financial plan tailored to their unique life. She prioritizes building long-term relationships with her clients and being the person they call when life throws a curveball or questions arise.
Susan is a CERTIFIED FINANCIAL PLANNER™ professional and has an MBA from Webster University and a Bachelor of Liberal Arts in Economics and Sociology from the University of Mary Washington. When she’s not serving clients, you can find Susan outside, either gardening, biking, or hiking. She’s a homebody at heart who loves music, especially playing the piano and cello. One of her favorite things to do is spend time with family, including her husband, Terry, her children, and her twin granddaughters, whom she affectionately (and appropriately) calls the “twinados.” To learn more about Susan, connect with her on LinkedIn.