When planning your IRA withdrawal strategy, you may want to consider supporting a favorite charity with tax-free contributions from your IRA. These contributions are known as qualified charitable distributions (QCDs) or charitable IRA rollovers.
How QCDs Work
You must be 70½ or older in order to make QCDs. You direct your IRA trustee to make a distribution directly from your IRA (other than SEP and SIMPLE IRAs) to a qualified charity. The distribution must be one that would otherwise be taxable to you.
You can exclude up to $100,000 of QCDs from your gross income in 2018. If you file a joint return, your spouse can exclude an additional $100,000 of QCDs in 2018.
QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA. In other words, they act just as if you had received the distribution from the plan. It’s important to know that to qualify as QCDs, the distributions must go directly to the charity. You can’t receive the IRA distribution first and then transfer it to a charity.
Caution: The gift cannot be made to a private foundation, donor-advised fund, or supporting organization (as described in IRC Section 509(a)(3)). The gift cannot be made in exchange for a charitable gift annuity or to a charitable remainder trust.
Why are QCDs important?
Without this special rule, taking a distribution from your IRA and donating the proceeds to a charity would be a bit more cumbersome, and possibly more expensive.
Can I name a charity as beneficiary of my IRA?
Yes, you can name a charity as beneficiary of your IRA, but be sure to understand the advantages and disadvantages.
Generally, a spouse, child, or other individual you designate as beneficiary of a traditional IRA must pay federal income tax on any distribution received from the IRA after your death. By contrast, if you name a charity as beneficiary, the charity will not have to pay any income tax on distributions form the IRA after your death (provided the charity qualifies as a tax-exempt charitable organization under federal law).
Of course, there are nontax implications. If you name a charity as sole beneficiary of your IRA, your family members and other loved ones will obviously not receive any benefit from those IRA assets when you die. If you want to support both, consider leaving your taxable retirement funds to charity and other assets to your loved ones. This may offer the most tax-efficient solution.
Remember: any major financial decisions should be made with the guidance of your financial or tax professional.
–Adapted from Broadridge Investor Communication Solutions, Inc. Copyright 2018