If you are age 70½ or older, IRS rules require you to take required minimum distributions (RMDs) each year from your tax-deferred retirement accounts. This additional taxable income may push you into a higher tax bracket and may also reduce your eligibility for certain tax credits and deductions. To eliminate or reduce the impact of RMD income, charitably inclined investors may want to consider making a qualified charitable distribution (QCD).
A QCD is a direct transfer of funds from an IRA custodian, payable to a qualified charity, as described in the QCD provision in the Internal Revenue Code. Amounts distributed as a QCD can be counted toward satisfying your RMD amount for the year, up to $100,000, and can also be excluded from your taxable income. This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution later on. In this scenario, the funds would be counted as taxable income even if you later offset that income with the charitable contribution deduction.
Why is this distinction important? If you take the RMD as income, instead of as a QCD, your RMD will count as taxable income. Having higher taxable income can directly impact your eligibility for certain deductions and credits. For example, your taxable income helps determine the amount of your Social Security benefits that are subject to taxes. Keeping your taxable income level lower may also help reduce your potential exposure to the Medicare surtax.
Am I eligible for QCDs?
In prior years, the rules that permitted QCDs required reauthorization from Congress each year, and those decisions were sometimes made late in the calendar year. With passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, the QCD provision is now a permanent part of the Internal Revenue Code. This means you can plan your charitable giving and begin reviewing your tax situation earlier each year.
The rules of QCDs
A QCD must adhere to the following requirements:
- You must be at least 70½ years old at the time you request a QCD. If you process a distribution prior to reaching age 70½, the distribution will be treated as taxable income.
- For a QCD to count toward your current year’s RMD, the funds must come out of your IRA by your RMD deadline, which is generally December 31 each year.
- Funds must be transferred directly from your IRA custodian to the qualified charity. This is accomplished by requesting your IRA custodian issue a check from your IRA payable to the charity. You can then request that the check be mailed to the charity, or forward the check to the charity yourself. Note: If a distribution check is made payable to you, the distribution would NOT qualify as a QCD and would be treated as taxable income.
- The maximum annual distribution amount that can qualify for a QCD is $100,000. This limit would apply to the sum of QCDs made to one or more charities in a calendar year. If you’re a joint tax filer, both you and your spouse can make a $100,000 QCD from your own IRAs.
- The account types that are eligible for QCDs include:
- Traditional IRAs
- Inherited IRAs
- SEP IRA (inactive plans only*)
- SIMPLE IRA (inactive plans only*)
- Under certain circumstances, QCDs may be made from a Roth IRA. Roth IRAs are not subject to RMDs during your lifetime, and distributions are generally tax-free. Consult a tax advisor to determine if making a QCD from a Roth is appropriate for your situation.
- Certain charities are not eligible to receive QCDs, including donor-advised funds, private foundations, and supporting organizations. You are not allowed to receive any benefit in return for your charitable donation. For example, if your donation covers your cost of playing in a charitable golf tournament, your gift would not qualify as a QCD.
Tax filing for QCDs
A QCD is reported by your IRA custodian as a normal distribution on IRS Form 1099-R for any non-Inherited IRAs. For Inherited IRAs or Inherited Roth IRAs, the QCD will be reported as a death distribution. You should keep an acknowledgement of the donation from the charity for your tax records.
If you are 70½ or older, own an IRA, and donate to charity, QCDs may make sense for you; consult a tax advisor regarding your specific situation.
Recent reports about the U.S. economy were a case of good news and bad news. The good news is that, in the second three months of the year, the U.S. economy grew at an estimated 4.1%—better than the 2.2% growth posted during 2018’s first quarter. The 4.1% figure is subject to revision as economists refine the numbers, but a 4% growth rate, if sustained through a period of years, would greatly bolster the wealth of all Americans.
The bad news is that the economy will almost certainly not sustain this growth rate. And despite what you are hearing from political pundits, there is also nothing remarkable about a single quarter’s 4.1% GDP increase. As you can see from the chart, what has been labeled “historic” is actually pretty ordinary over the long term. The economy exceeded last quarter’s level four times during the Obama presidency, in 2009, 2011 and twice in 2014. 4.1% growth would have been considered alarmingly slow during the Reagan presidency.
Why can’t we sustain even this ordinary level of GDP growth? Economists have noted that this spike in economic activity was not entirely unexpected, and is the result of a number of one-off events. You might remember that Congress passed a significant corporate tax cut last. year, which kicks in at an unusual time: toward the end of a very long economic expansion, with consistently falling unemployment and rising home values. The U.S. economy just entered its tenth consecutive year of growth. Typically Congress will pass a stimulus package to bail the country out of recession. One economist described the second quarter as an economy on a “sugar high.” If you have ever had small children, you know how those often end.
In addition, the quarter was aided (predictably) by foreign companies stockpiling U.S. goods before the threatened tariffs disrupt the flow of products across borders—temporarily boosting U.S. exports.
Long-term, the GDP of any country is determined by the growth in the number of workers and the rising productivity of those workers as they labor at their desks and on the factory floor. Neither of those factors are growing at anywhere near a 4% rate currently, which suggests that next quarter will see a return to the average 2-2.5% rate that we’ve experienced since 2009. That, in turn, may explain why the U.S. stock indices actually fell on the day of the “historic” GDP announcement. Savvy investors know better than to project one quarter’s results forward indefinitely into the future.
In all the debate over how or whether we need affordable care, state registries, guaranteed coverage despite pre-existing conditions etc. etc., few Americans realize that our U.S. healthcare system has been totally out of control, cost-wise, for decades.
A recent study by the Kaiser Foundation found that virtually every developed nation has some form of universal healthcare, and their citizens pay much lower prices for healthcare, overall and for individual procedures and drugs. It found that the average American spends more than $10,000 a year for health expenditures, by far the highest in the world, which comes to fully 18% of total GDP. The average citizen of the average developed nation spends roughly $5,000 a year for similar care—half what we do in the U.S.
But that probably means that other citizens have less access to healthcare. Right? Wrong. Despite paying more, the average American has fewer physician consultations—about 3.9 per person per year, well below the 7.6 average for other countries, far behind the 12.7 visits per Japanese citizen. The researchers also note that Americans have a shorter average stay in hospitals—6.1 days vs. 10.2 days on average for other developed nations.
Delving into specific procedures, the Kaiser study found that Americans pay more for angioplasty and coronary bypass surgery, MRI exams, colonoscopies, appendectomies and knee replacement surgeries. In fact, the cost of a knee replacement in the U.S. ($28,184 on average) is nearly twice the cost of a similar procedure in Australia ($15,941). A variety of expensive drugs are much costlier to American patients than to people living abroad.
The study doesn’t offer any prescriptive recommendations; nor does it show whether the passage of the Affordable Care Act helped or hurt America’s standing as the highest cost health provider. It doesn’t actually draw any conclusions at all, simply presenting data for us to think about. What the data seems to be saying is that our healthcare system has been broken for quite some time, and that other countries seem to have found better ways to keep their costs under control without compromising access to healthcare professionals.