By: Ian M Maddox, CRPS®
ENJOY (60+): The Planning Phase
Not too many people enjoy paying taxes. Of course, we value the services they provide: schools, fire and police protection, judicial systems and our military. But, since I am as guilty as the next guy or gal, my pen hesitates on that IRS check signature line too. Taxes are simply par for the course so it’s no wonder we look for loopholes, deductions, credits or anything that might keep more dollars in our own wallets. So, if you are over 70 ½ years of age, there is another legal possibility for you to consider. The Qualified Charitable Distribution or QCD, is just one tool in the retiree’s arsenal to shield a portion of their income from taxation, particularly for those that are charitably minded.
So, what exactly is a QCD? A Qualified Charitable Distribution is a direct distribution from a traditional IRA to a charitable organization. It can be up to $100,000 per year and it allows them to gift the IRA assets to a qualified charity without taxation on the distribution.
The QCD has been in existence since 2006. It began with the Pension Protection Act on a temporary basis and after lapsing several times was made permanent on January 1st, 2016 at the inception of the Protecting Americans from Tax Hikes Act. The Act limited its use to those age 70 ½ and above—interestingly the same age the IRS requires individuals with IRA’s to begin taking minimum distributions (RMD).
Beginning in 2018 the QCD could be very important because of recent changes in tax laws. With the new higher standard deduction amounts, fewer people will be itemizing expenses on their tax returns this year. This means that the distribution from traditional IRA accounts will simply add to the taxable income level but, for many, without a corresponding tax deduction. The practical effect is that the individual may pay more taxes without using the QCD.
For individuals living on distributions from qualified accounts, utilizing the QCD in this situation can still apply but will require forethought. The IRS considers the very first distribution of any given calendar year as applying towards RMD requirements and cannot be undone once distributed. In other words, the QCD needs to be distributed prior to other distributions. And, for charitable minded individuals who are not taking distributions and desire for their investment money to stay invested, the QCD amounts can be replaced by after tax money that would have gone to the charity.
Since the government is requiring you to distribute money from your IRA anyhow, and since the QCD option may help reduce taxes on those distributions while simultaneously gifting money to church or charity, it becomes a compelling option to consider. Of course, QCD’s like other distribution strategies should always be discussed with your financial advisor, tax accountant or attorney and considered on a case by case basis.
About Hitchcock Maddox Financial Partners (HMFP):
HMFP is a comprehensive and collaborative financial planning firm headquartered in Trussville, AL, serving clients and their community since 1999. Collectively, HMFP advisors have provided guidance in the areas of Financial Planning, Investing, Retirement and Insurance for over 35 years. For more information please visit www.hmfp.us or call 205-201-1401.