What is a Qualified Charitable Distribution and When Should You Take It?

Should you be rethinking the way you give? In my opinion charitable giving should be a core part of a financial plan. It helps us balance money in life and reminds us that there are others less fortunate than we are.

If you are 70 and a half, it’s important to be strategic in maximizing the tax effect of charitable giving. If you’re over 70 and a half you must begin taking required minimum distributions from your retirement accounts. If you’re 70, you must take out approximately four percent initially. When you take that money out most, if not all of it, is going to be taxed as ordinary income and go directly onto your tax return. That affects many of the other taxes we pay. Many of you know this, but you can give money through a qualified charitable distribution. You can give money directly from your IRA to a church or charity, and it counts toward your required minimum distribution.

That is very significant for many different reasons. First, the money comes off page one of your tax return, as opposed to having a tax deduction on page two. That makes a big difference. Anything removed from page one of your tax return is substantially stronger.

There are a few other areas that can affect you as well. Consider whether you’re itemizing enough outside of your charitable contributions to itemize at all. If you removed charitable contributions, and therefore would not be itemizing, you are not getting the full value of your contribution. Everything listed on page one of your tax return can affect how much you pay on your Medicare premium and it can affect how much of your Social Security is taxed. All those numbers are related.

It is usually more powerful to give money to the church or charity of your choice directly from the IRA. This is what is called a qualified charitable distribution. In this case, the charitable contribution is not taxed at all on page one of your tax return and it helps lower other things. This process ensures you get the full value of the contribution as a deduction from income. It may also help with Medicare premiums and Social Security taxation.

Remember, you can only participate in a qualified charitable distribution if you’re over 70.5, and you can only pull it from an IRA. You cannot pull it from a company plan. This is one more reason you should consider rolling company plans into IRAs. When it comes to tax planning, make sure you’re taking full advantage of the qualified charitable distribution. It is now a permanent part of the law.