Leveraging QCD Gifts for Good By: Pragya Murphy
Many individuals spend years contributing to retirement accounts, however, when retirement age approaches, many do not look necessarily forward to taking required distributions from these funds. This may be because they do not need the extra income and want the dollars to stay invested. Most often, though, it seems that retired individuals do not like the additional taxes they have to pay. 


Let’s take the example of a couple, Jack and Diane, who reached this crossroads a few years ago.  They wanted to use their required minimum distribution to accomplish their charitable goals while also avoiding taxes. Fortunately, there is a strategy for retired individuals and couples to make this happen.  


How does it work?


An individual has to be eligible, which means they have to have an IRA and need to be at least 70 ½ years old. At that age, annual withdrawals from IRA accounts become mandatory and are referred to as required minimum distributions (RMDs). Once determined to be eligible, an individual can use a qualified charitable distribution (QCD), also known as a charitable IRA rollover, to reduce the impact of taxes and also help worthy causes and organizations. Individuals can direct up to $100,000 per year from their IRA to eligible public charities without counting the amount as taxable income. For married couples, both spouses can make individual gifts of up to $100,000 from their traditional IRAs, for a total of $200,000. These direct distributions even count towards a client’s RMD.  


QCDs from traditional IRAs have become one of the fastest growing types of charitable gift, benefitting both individuals who do not need to take the income from their RMDs and the charitable organizations that they care about. According to a recent survey, the average use of QCDs increased by 73.8 percent from 2017 to 2018. This significant spike in popularity is attributed to an aging American demographic coupled with changes in tax law. As the 3 to 4 million baby boomers born each year between 1946 and 1965 are reaching the age of 70 ½, more and more retirement accounts are being affected by the RMD rules. 


Also, since the introduction of higher standard deduction requirements in the 2018 Tax Cuts and Jobs Act, fewer taxpayers are itemizing and are looking to use their RMDs while not affecting their taxable incomes. In 2019, the standard deduction rose to $12,200 for individuals and $24,400 for married couples filing jointly, which is almost double the pre-tax reform standard deduction in 2017. 


One of the appealing factors of QCDs is that they can be made to any public charity or house of worship across the country, as long as the gifts are made outright. The Pension Protection Act of 2006, which created the charitable IRA rollover, specifically prohibited transfers to donor-advised funds or private foundations. Therefore, when using the charitable IRA rollover to make a gift to a community foundation, the gift must be directed to a permanent fund. 


Community foundations can work with individuals who want to use a QCD to create almost any type of permanent fund that will carry on their charitable wishes forever. A permanent fund can be structured in several ways:


  • It can support the greatest needs of the community each year as a general endowment fund. This type of fund supports local nonprofits through a competitive grantmaking process at the Community foundation.
  • It can support a geographic or topical field of interest such as programs to reduce poverty or care for animals.
  • It can be designated to support specific nonprofits as indicated by the donors.


No matter how it is designed, the fund becomes a permanent source of charitable support in the community. A donor may make additional gifts to the fund both during their lifetime and through their estate. Community foundations are designed to steward such funds in perpetuity as nonprofit agencies or charitable needs change and evolve in the community.


Let’s return to our example of Jack and Diane. For them, this tax-advantaged opportunity was a no-brainer. Having spent more than 40 years living and working in this region, the couple knew they wanted to do something to give back to the community that had given them so much. Giving back through their RMDs was the simplest, most tax efficient and flexible way for them to do so. 


They both had served on numerous nonprofit boards and remained civically engaged through various volunteer efforts. Diane, a retired teacher, and Jack, an engineer, each had their own list of preferred charities and found it difficult to choose which ones should receive their support. .They opted to establish a field-of-interest fund for literacy and S.T.E.M. education, as well as a named community fund to support the broad and changing needs of the region at their local community foundation after evaluating their overarching goals for charitable impact and how they wished to be recognized and remembered in the community. The multi-purpose interest areas reflect each of their individual passions, while still allowing for flexibility based on changing community needs.


By using a charitable IRA rollover to create these funds, Jack and Diane were able to make a gift that will keep on giving for generations to come.


Benefits of using QCDs for Charitable Giving


One of the main advantages of doing a QCD from an IRA is that the distribution comes out of the IRA without any tax consequences and is excluded from income altogether while also counting for RMD purposes. It is also important to remember that there is no charitable deduction for making a contribution to charity with a QCD as the IRA was already funded on a pre-tax basis.  When giving to community foundations or other endowments, retired individuals can use QCDs to have immediate and ongoing impact. Most importantly, QCDs open the door for new and flexible giving opportunities for people who love this community to support the causes most important to them.  
 
Pragya Murphy

Pragya Murphy is Development Officer at the Central New York Community Foundation. She is responsible for deepening and broadening the advisor network across the five counties service area, as well as continuing to develop and implement the Community Foundation’s development program. Pragya works in...

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