Qualified Charitable Donations: Using IRAs as a Charitable Piggy Bank for Investors


Qualified Charitable Distributions, or QCDs, are a tax provision allowing people age 70 ½ or older to designate funds from pre-tax IRAs to be sent directly to a charity(s). Initially, QCDs were a temporary provision in the tax code as part of the Pension Protection Act of 2006. This was set to run through the end of 2007, however, after 2007 there were last-minute, and sometimes retroactive, legislative Acts that reinstated this provision for a year or two.

Finally, in December of 2015, the PATH Act made this provision permanent going-forward and eliminated the guessing game every year. The law permits any individual that is 70 ½ or older to gift up to $100,000 annually from a pre-tax IRA to a charity, or charities, of their choice. Normally, distributions from a pre-tax IRA are taxed as ordinary income and follow the marginal tax rate schedule. However, QCD legislation allows distributions to be made from the IRAs and shields them from tax returns so long as they go to a qualified charity. It is important to note that individuals must actually be age 70 ½ at the time of the QCD, not simply turning 70 ½ sometime that year.



Satisfy Charitable Contributions and Supporting Greater Good

Most people make charitable contributions throughout the year to causes that are important to them. These range from weekly contributions to a church, contributions to local non-profits, donations to a college alma mater, or more national, far-reaching agencies. Utilizing the QCD provision is a great way to facilitate normal annual gifting or one-time pledges to organizations in a tax-free manner.

QCDs are permitted to any organization that qualifies as a 501(c)(3) charity. Doing a QCD can simplify charitable gifting by consolidating weekly or monthly giving into quarterly, semi-annually, or even annual gifts. There is no limit as to how many charities you can gift to.


Satisfy RMD

A major benefit of the QCD provision is that it can be used to fully or partially satisfy required minimum distributions (RMDs) from pre-tax IRAs. Upon reaching 70 ½, individuals must take out a percentage of their pre-tax IRAs, or 401(k)s, that have grown tax-deferred over their working years. Individuals can also utilize the QCD provision for an RMD on an inherited IRA if they are personally 70 ½ at the time of the distribution. The RMD is calculated by using the previous year-end balance of pre-tax retirement accounts and dividing this number by a life expectancy factor. The beginning RMD distributions for a married person is approximately 3.75% of their total pre-tax IRAs.

  • For example: Sam Smith, turned 71 in April 2018. He retired a few years ago and rolled over his old employer 401(k) into a pre-tax IRA. Sam took his first RMD in 2017 and the IRA balance on December 31, 2017 was $1,000,000. Sam would need to take out roughly $37,500 as his RMD from his IRA before December 31, 2018. For married couples, it is common for both spouses to have pre-tax IRAs that are subject to RMDs. The QCD provision allows people to use distributions sent directly to charity (or a check made payable to charity sent to them) to count towards annual RMDs.


Minimize Taxes

The above fictitious example of Sam Smith is a common scenario. Sam would have to recognize an additional $37,500 in ordinary income on his tax return, and his spouse may have an additional RMD that needs to be counted as income. Retirees often see their income rise in retirement upon reaching 70 ½ because of large RMD income.

Using the QCD can prevent pushing people into the next tax bracket if their RMD is big enough because it shields some or all RMD income which would normally be taxed. For others, utilizing the QCD provision can keep more of their Social Security income non-taxable, keep Medicare Part B and Part D premiums lower, and help others avoid the 3.8% net investment income tax by shielding RMD income from a tax return.


QCD Becoming More Prominent in the Wake of the Tax Cuts and Jobs Act of 2017

Many people make charitable donations by transferring highly appreciated stocks or securities from their taxable brokerage accounts to a donor-advised fund or organization like the Omaha Community Foundation charitable checkbook. This strategy avoids high capital gains and helps get an upfront deduction in the year securities are gifted, yet has the flexibility to gift proceeds to charities of their choosing over subsequent multiple years. We still think this is a worthwhile strategy for younger investors, but the new tax law has made the QCD even more powerful for those over age 70 ½. As a side note, QCDs are not permitted to be made into donor-advised funds but must be made payable or go directly to a charity.

Standard Deductions

The Tax Cuts and Jobs Act of 2017 (TCJA) brought on broad, sweeping changes to the tax code. One of the biggest changes was an expanded standard deduction and increased limitations on itemized deductions. A direct correlation of these changes included dramatic shifts in the tax benefit of making charitable donations.

Previously, the standard deduction for a married couple filing jointly (MFJ) was $12,700, with personal exemptions of $4,050. Thus, MFJ couples got $20,800 combined in standard deductions and personal exemptions. TCJA consolidated the standard deduction and personal exemptions into one larger standard deduction of $24,000 ($12,000 single filer). For those who are 65 and older, an additional $1,300 standard deduction is added per individual.

Itemized Deductions

Additionally, the new tax law significantly limits allowable itemized deductions. Namely, state and local taxes (SALT) and real estate taxes are now capped at a combined limit of $10,000 annually versus the old law allowing individuals to include the full amount of these taxes as itemized deductions. On top of this, miscellaneous itemized deductions (tax preparation, investment advisory fees, organization fees, safety deposit boxes, etc.) in excess of 2% of AGI were repealed for individuals.

As a result, the only deductions that are left are the $10,000 limit for SALT/real estate, home mortgage interest, charitable contributions, and medical expenses in excess of 7.5% of AGI (2018). Thus, more than 90% of the population will be filing the standard deduction in 2018 and beyond because they don’t have enough itemized deductions to eclipse the much higher standard deduction limits.

For many retirees, one of their major goals before retirement is paying off the mortgage. Without mortgage interest to deduct, the only eligible itemized deductions are from SALT/real estate taxes and charitable contributions (and maybe medical deductions). With SALT deductions now limited to $10,000 and no other eligible deductions, the first $14,000 or $16,600 (couples over 65) of annual charitable gifting for married couples has no tax advantage.

QCDs are unquestionably the way to gift for anyone over 70 ½ given these new tax laws because you are taking pre-tax funds and gifting them to charity—in essence getting a full tax deduction you might not otherwise get. Thus, the QCD provision has turned IRAs into Charitable Piggy Bank for those over the age of 70 ½.


Like any tax recommendations, we suggest you or a loved one speak with your CPA to discuss the merits of potentially using the QCD provision. It is not an all or nothing proposition. If you wish, you can designate only a small portion of your RMD to go to a specific charity or charities. At any rate, I would expect the QCD provision to continue to gain popularity as a great way for those over age 70 ½ to give to the charities of their choosing because of the recent tax law changes that have gone into effect for 2018.



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Nick Hall is an Investment Adviser at Lutz Financial. With 10+ years of relevant experience, he specializes in creating thorough, adaptive financial plans and investment management strategies for high net-worth families. He lives in Omaha, NE, with his wife Kiley, and daughter Amelia.

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