“Can you summarize the rules and changes to qualified charitable distributions (QCDs)?”
ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from California is representative of a common inquiry related to charitable giving.
Highlights of the Discussion
• I’d love to. As you have likely heard the SECURE Act of 2022 made changes to the rules for QCDs, making more opportunities for gifting. Let’s review the existing rules, enhancements that took effect in 2023 and the change that will happen next year and going forward.
• To review, a QCD is any otherwise taxable distribution (up to $100,000 for 2023) that an “eligible IRA owner or beneficiary” directly transfers from an IRA to a “qualifying charitable organization.” The deadline to complete the transfer for 2023 tax purposes is December 31, 2023. For 2024 and later years, the $100,000 will be adjusted for inflation. In fact, the 2024 maximum increased to $105,000 as announced in IRS Notice 23-75.
• An eligible IRA owner or beneficiary for QCD purposes is a person who has attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactive” Simplified Employee Pension (SEP) IRAs or Savings Incentive Match Plans for Employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
• Beginning in 2023 and for later years, a QCD also can include a one-time gift of up to $50,000 (adjusted for inflation) to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. The $50,000 limit will increase to $53,000 for 2024
• Charitable remainder trusts and gift annuities provide current income to a beneficiary and when the beneficiary passes on, the remaining amount in the trust or annuity goes to a named charitable cause. According to the rules, up to 90% of the value of the initial gift ($45,000 in this case) can be paid to the beneficiary over a maximum of 20 years, with at least 10% of the initial gift going to the named charity after that.
• What are the benefits of making a QCD? Generally, IRA owners/beneficiaries must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year. A QCD
Is excludable from taxable income,
May count towards the individual’s RMD for the year,
May lower taxable income enough for the person to avoid paying additional Medicare premiums;
Is a philanthropic way to support a favored charity; and
May provide income to a beneficiary of a charitable remainder trust or gift annuity during his or her lifetime and a gift to a charitable cause thereafter.
• Note that making a QCD does not entitle the individual to an additional itemized tax deduction for a charitable contribution.
• Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Exempt Organization Select Check, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.
• Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
• Be aware there are special IRS Form 1040 reporting steps that apply to QCDs.
• Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7, Q&A 40 ).
Eligible IRA owners and beneficiaries age 70 ½ and over, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations. And with the SECURE Act 2.0 changes, there’s more to love about QCD gifting.