If you give to charity and have an IRA, you may be able to save on taxes by doing a qualified charitable distribution.

 

I know a businessman in my church who made it his goal to be able to live off of 10% of his income and give 90% to the church. He figured it wasn’t fair for him to get 90% and for the creator of the universe to only get 10%, so he switched it around.

 

As a pastor, you probably can’t afford to do what that man did. After all, your family does have to eat. But I’ll bet you wish you could. I’ll bet you have a generous heart and give above and beyond the tithe.

 

As such, when you retire, you probably don’t plan on retiring from generosity. Without an income you may not be tithing, but that doesn’t mean you will completely cease to give. What if I told you that there is a way to save on taxes so that you’ll be able to give even more?

 

IRA Required Minimum Distributions

If you have a traditional IRA, rollover IRA, inherited IRA, inactive SEP IRA, or inactive SIMPLE IRA, you are subject to required minimum distributions (RMDs). That means that by law, once you reach age 70 ½, you have to start taking money out of your account, even if you don’t need it to live on.

 

When you take money out of your retirement account, you pay taxes on it. After you pay taxes, you use the rest of the money however you see fit, such as giving it to the church or another organization. There is a way to bypass the “paying taxes” part on any money you are giving to a church or charitable organization: a qualified charitable distribution (QCD).

 

How Qualified Charitable Distributions Work

A QCD is a distribution directly from your retirement account to a qualified non-profit organization. If the money goes straight from your account to the organization, it will not be taxed. That means you’ll have even more to give!

 

The QCD counts towards your RMD, which is the money you have to take out anyway. And, because it isn’t taxed, it doesn’t count towards your taxable income. So, you will have a lower taxable income, which helps with certain tax credits and deductions and the taxability of your Social Security benefits.

 

Example

Let’s look at an example. Bob has an RMD of $5,000 for the year. Normally, he would take the distribution and pay his 15% tax of $750. (Tax rate is for illustrative purposes only.) Then, he gives $1,000 towards his church’s building project and is left with $3,250.

 

If Bob does a QCD, then $1,000 goes directly to his church and $4,000 is distributed to him. His taxes on $4,000 are only $600. That is a $150 tax saving that he could use to give even more to the church!

 

Qualified Charitable Distribution Requirements

As with most things, just anyone can’t make a QCD. You must meet certain criteria for the distribution to be an eligible QCD. Here they are:

1. You must be 70 ½ or older to make a QCD.

2. The maximum dollar amount is $100,000 per year per person, no matter how many charities are involved.

3. You cannot take a QCD from an employer retirement plan.

4. The QCD must go to a public charity and therefore cannot go to a private foundation or donor-advised fund.

5. The charitable distribution from the IRA must be one that would have otherwise been eligible for a full charitable deduction.

6. The QCD must come out of your account by December 31 of the year that you want it to count towards your RMD.

7. The check cannot be made payable to you, the account owner, but rather directly to the charitable organization. (It can be sent to you for you to forward to the organization, as long as it is made out to them and not you.)

 

How To Take A Qualified Charitable Distribution

So, if you have an IRA that requires you to take RMDs, you can give more to God and less to the government by utilizing a qualified charitable distribution! Here’s how you do it:

 

1. Already be at least 70 ½ on the date of distribution.

2. Submit a distribution request form to your IRA custodian and request that the check be made payable directly to the charity.

3. Make sure your IRA custodian doesn’t withhold any taxes on the distribution to the charity.

4. Have the IRA custodian send the check directly to the charity or to you to forward to the charity.

 

The most important thing is to make sure that the check is made payable directly to the church or charitable organization because otherwise, it will be a taxable distribution and not a QCD.