The Harvest Fund (QCD): Jumpstart a Legacy of Philanthropy in Retirement, with your Charitable IRA Rollover
By Randall Sanada, CFP, CKA
There is a provision in the IRS tax code that allows taxpayers to rollover up to $100,000 per year from their IRA to a charitable organization once they reach the age of 70 ½. Technically called a Qualified Charitable Distribution (QCD), this can help satisfy the Required Minimum Distribution (RMD) that starts at age 72. The RMD is the IRS’s way of collecting taxes on the taxpayer’s IRA accounts (substantially during their remaining lifetime), to make up for the earlier tax deductible contributions into the IRA. The RMD can put a significant tax burden on retirees by forcing them to pay higher taxes as a result of the added taxable income recognized from the forced annual IRA withdrawals. The QCD can remedy that problem by directing the RMD to charity (via the QCD) and thus no additional taxes due from the retiree.
At first blush, the QCD provision doesn’t sound like much of a benefit since the charitable minded taxpayer might get similar benefits by simply writing a check to a charity and securing a write-off of that amount on their Schedule A of itemized deductions. Theoretically that write-off could offset the added taxable income from the RMD. But one must remember that many taxpayers no longer use the Schedule A since they get a better tax benefit by using the standard deduction. Therefore their charitable contributions are giving them virtually no tax savings at all.
In addition to protecting the taxpayer from moving up to a higher tax bracket, the QCD can sometimes enable the taxpayer to transition from using the Schedule A over to the standard deduction, thus getting the best of both worlds (tax free RMD satisfaction via the QCD while at the same time maximizing their write-offs via the standard deduction instead of itemizing).
An additional benefit of the QCD is reduced impact on the taxability of Social Security benefits. The RMD taxable income increases one’s Provisional Income calculation which can cause up to 85% of Social Security benefits to be taxed. The QCD can help prevent this double tax burden from occurring.
There is a completely different benefit of the QCD for high income taxpayers who are also generous givers: It can increase one’s tax favored annual giving above the 60% of Adjusted Gross Income (AGI) limit. Many generous givers consistently hit or exceed the 60% annual AGI limit typically by giving from both their income and their assets. The QCD enables these givers to contribute an additional $100,000 per year above the 60% threshold in a tax favored way.