Why Long-Term Care Matters

Nov 13, 2019
Joe Yoon, CFP ®, CIMA ®

We recently produced a blog post extolling the virtues of using appreciated capital assets to fund your charitable intentions. In this post, we will introduce the reader to the Qualified Charitable Distribution (QCD). A QCD allows an IRA account owner to contribute a part or all of their Required Minimum Distribution (RMD) to a charitable endeavor.

Once an IRA owner reaches age 70 1/2, they must begin taking RMD's from their IRA account. The RMD is calculated each year using the ending balance of the IRA account from the previous year and an IRS table providing the calculation formula. It sounds complicated, but it is straightforward to calculate. The distributions are taxed at whatever ordinary income tax bracket you are in for that year.

The penalties for failing to take your RMD are steep. If an IRA account owner fails to withdraw their RMD in any given year, they are penalized an excise tax equivalent to 50% of the RMD amount for that year. For example, if your RMD were $100,000, the penalty for not taking the RMD would be $50,000. Additionally, you will still be required to take the RMD on which you will then owe tax.

If you must take an RMD but do not want or need the money, QCD's can be an excellent way to distribute the money out of the IRA and avoid the excise tax, avoid ordinary income tax and satisfy your charitable endeavors. By allowing a portion of your RMD to serve as a QCD, you keep the income you would otherwise owe tax on from being included on your 1040. This will lower your Adjusted Gross Income (AGI), which can help prevent your income from reaching thresholds that would expose you to the net investment income tax. The benefit of a QCD is your RMD will never appear as income for that year. The downside is you won't be itemizing that charitable deduction either. However, since the amount of each taxpayer's standard deduction has doubled as a result of the Tax Cuts and Jobs Acts, some taxpayers are using the standard deduction instead of itemized deductions, thereby diminishing the benefit of itemized charitable deductions. For those taxpayers, the QCD is the only way they can still benefit from making a charitable contribution.

The requirements for a distribution to qualify as a QCD are:

  • you must be age 70 1/2 (required to start taking RMDs)
  • the maximum amount eligible for a QCD in any year is $100,000
  • the distribution from the IRA must be made payable directly to the charitable institution
  • and the receiving institution must be a 501 (c)(3) or a house of worship

If you're already a client of AOG, and you have questions or concerns about your current financial position, please reach out to your advisor.

If you are interested in AOG Wealth Management, we encourage you to give us a call at 703-757-8020 so we can learn more about you, your family, and your financial future.

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