Retirement should be about fulfilling your life's most long-standing goals. If doing good in the world is among them, there's no better time to lean into charitable giving.
There are so many reasons to give to charity: Nearly 70% of affluent charitable donors say they give to uphold their personal values and beliefs, according to the National Philanthropic Trust; research has found that monetary giving is good for your heart and your overall happiness; and thanks to Qualified Charitable Distributions (QCDs), retirement giving can benefit your income strategy as well.
Here's how eligible retirees can utilize QCDs to reach their philanthropic goals and make strategic moves at the same time.
QCDs work
QCDs are available to IRA owners 70 ½ and older who make a donation to an eligible charitable organization directly from their IRA. These are tax-free distributions up to $100,000. For married couples, they are tax-free up to $200,000—as long as both spouses are at least 70 ½This differs from normal IRA distributions, which are taxable when received by the owner.
To be a QCD, it's critical that the distribution goes directly to the charity by the IRA trustee. If the distribution is first made to the IRA owner and then the owner makes the donation themselves, it does not qualify.
QCDs are ideal for retirees who don't itemize
A QCD donation does not result in a tax deduction for the IRA holder. That may sound like a drawback until you consider a QCD's potential impact on your full financial picture.
For retirees who don't itemize their deductions, a QCD is an easy choice. Because taxpayers 65 years of age and older get an additional standard deduction, not itemizing can have increased appeal.
QCDs can help lower your taxable income
Even for those who do itemize, the tax benefits of a QCD may be greater than the potential deduction. A typical IRA distribution becomes part of the retiree's taxable income. Because a QCD is tax-free, it does not, so making planned charitable donations in this way can lower a taxpayer's taxable income.
A lower taxable income has benefits of its own. For some taxpayers, a $100,000 tax-exempt QCD versus the same donation made directly from the IRA owner could be the difference between their taxable income falling in a lower, more beneficial tax bracket.
QCDs count toward required minimum distributions
Another tax benefit of a QCD is its impact on required minimum distributions, or RMDs. For retirees with robust IRA savings, the RMDs can be a bit of a hassle. Whether you need it or not, IRA owners aged 73 and older are required to withdraw — and pay taxes on — a minimum amount as determined by an IRS calculation.
However, while QCDs are not taxed, they do count toward your RMD. For retirees who don't need to tap into an IRA to maintain their lifestyle, meeting part or all of an RMD without paying income taxes on the withdrawal can be a big tax benefit—and the eligible charity of your choice benefits, too.
Meeting your charitable and retirement income goals
As always, it's important to consult your trusted financial advisor to assess how QCDs will impact your unique situation and retirement plan. A financial advisor can also help you develop a charitable giving component of your financial plan, if you don't have one already.
A charitable giving plan can help you determine how much you plan to give, how to choose eligible nonprofits that align with your values and goals, and whether to support multiple charities with small to medium-sized donations or to focus your giving with significant contributions to one organization. Websites like Charity Navigator or the Better Business Bureau's Give.org can be excellent tools for finding and assessing nonprofits.
Regardless of which charities you support or your giving strategy, planned philanthropy can be a rewarding part of your retirement lifestyle, for both the causes you support and your tax bill.
Are you over 70 ½ and interested in maximizing your charitable giving while reducing your tax liability? Talk to a Fulton Private Bank wealth advisor about using QCDs in your strategy.
