When saving for retirement, tax advantages play a significant role. Traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans such as 401(k)s offer tax-deferred growth, so you don’t pay taxes on the investment gains — as long as the money stays in your account.
However, the IRS doesn’t want you to avoid paying taxes on these funds indefinitely.
If you’re approaching age of 70½, required minimum distributions (RMDs) will help ensure that you start withdrawing money from your tax-deferred retirement accounts and pay the appropriate taxes on those distributions. But did you know that a qualified charitable distribution (QCD) can fulfill your RMD obligations while avoiding taxes on the distribution?
The ABCs of a QCD
A QCD refers to a taxable distribution that is paid directly from an IRA to a qualified charity. According to the IRS, this includes nonprofit groups that have a charitable, educational, religious, literary or scientific purpose, or that work to prevent child or animal cruelty.
When a QCD is directly paid from your retirement account to an eligible charity, it’s not included in your taxable income, meaning the distribution is tax-free. The giver must be at least 70½ at the time the QCD is made.
Because it’s tax-free, you cannot deduct the QCD on your Schedule A as an itemized deduction. In order to claim that charitable contribution deduction, your total itemized deductions must exceed the standard deduction. Keep in mind, the increased income resulting from the distribution could impact your eligibility for certain tax credits and push you into a higher tax bracket.
Questions regarding qualified charitable distributions? Let us help you with tax planning to minimize your tax burden and make the most of charitable giving. Reach out to the tax experts at Magone & Company or call us today at (973) 301-2300 for an evaluation of your tax situation.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.