Individuals who have retired and are over the age of 72 are required by the IRS to withdraw a specific amount each year from their tax-deferred retirement plan contributions. This mandatory withdrawal is known as Required Minimum Distribution (RMD). Qualified Charitable Distribution (QCD) is a type of gift made directly from your IRA to a qualified charity that can help fulfill your RMD. The QCD amount is not included in your taxable income. Although a QCD cannot be made to a donor advised fund, it can be used to contribute to your scholarship fund or a fund designated for a specific charity. Not meeting your RMD can result in substantial penalties, so using this giving vehicle can be very beneficial.
For example, let's say that you are 75 and have contributed to a tax-deferred retirement plan throughout your career. Now retired, to fulfill your RMD, you are required to withdraw $10,000 each year. Instead of withdrawing the entire amount and paying income tax on it, you can choose to donate all or a portion, let’s say $5,000, directly to a nonprofit organization or a designated fund at your community foundation through a QCD. This will satisfy your RMD requirement. You can continue to support the same charity year after year, fulfill your RMD requirement, and avoid those pesky tax penalties. It’s a win-win!
Reach out to your financial advisor to see if a QCD is a good way to fulfill your annual RMD.