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Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants 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, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Massachusetts is representative of a common question on qualified charitable IRA distributions (QCDs).
In general, a QCD is a tax-free donation (of up to $100,000 indexed) that an “eligible IRA owner or beneficiary” directly transfers from an IRA to a “qualifying charitable organization.” Additionally, there is a one-time election to make a QCD (of up to $50,000 indexed) to a charitable “split-interest entity” (described later). The deadline to complete the QCD transfer for 2024 tax purposes is December 31, 2024. Note that making a QCD does not entitle the individual to an additional itemized tax deduction for a charitable contribution.
SECURE Act 2.0 made two key changes to the rules for QCDs:
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 split-interest entity, defined as a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. The $50,000 limit increased to $53,000 for 2024 and to $54,000 for 2025 (Notice 2024-80).
The annual IRA QCD limit of $100,000 is indexed for inflation. For 2024 this amount is $105,000 and for 2025 this amount is $108,000 (Notice 2024-80).
An eligible IRA owner or beneficiary for QCD purposes is a person who has attained age 70½ 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).
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.
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.
Other miscellaneous rules to keep in mind:
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 ).
Conclusion
Eligible IRA owners and beneficiaries age 70½ and over, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.