Qualified Charitable Distributions: Do Them Early!
Wealth is always In Formation, and the quality of the information you receive on an ongoing basis and that you act upon, determines your long-term financial success.
Qualified Charitable Distributions, or QCDs, are one of my favorite tax-smart financial strategies. In order to make QCDs count, there are a number of rules that must be strictly followed, as well as advice that we give our clients to make sure they successful to their fullest extent.
A QCD is a way to give money directly to a charity without taxation. If done properly, you do not pay tax, and the charity does not pay tax, a Win-Win! For the IRS to agree, the charitable gift must come from your IRA, you must be at least 70 ½ years old at the time of the distribution, the charity must be a qualified 501c(3), and the check must be made out directly to the charity.
Our advice to our clients is to maximize this tax benefit by making the QCD simultaneously count toward their Required Minimum Distribution, or RMD, for our clients who are past their RBD, or Required Beginning Date. Here is where the order of things becomes very important.
In order for your QCD to count as part of your RMD, the QCD must be processed before your RMD is fully distributed from your IRA. To underscore the importance of timing, you must also know that the IRS has a “first dollars out” rule, meaning that in every year that an RMD is required, the first dollars distributed from an IRA are treated as the RMD. Your RMD must be processed before other distributions or transactions happen from your account. A couple of common examples would be conversions to Roth, rollovers from an employer sponsored retirement account such as a 401k or a 403b to an IRA, as well as beneficiary distributions due to death of an account owner, to name a few. Therefore, we advise that your RMD be processed earlier in the year, rather than later, to avoid potential costly IRA mistakes and the penalties that so painfully go along with them.
Since RMD must be processed before other IRA transactions, and for your QCD to be counted toward your RMD, the QCD must be timed properly, we strongly advise getting your QCDs distributed to your charities of choice, early in the year. Another important factor is understanding that your QCD only counts once the charity cashes the check (as opposed to when it leaves your IRA). We have seen this take longer than we’d expect, for various reasons at charitable organizations.
With all the complexity surrounding IRS rules, RMDs are no longer “set it and forget it” until the end of the year. To make the most of your tax-smart strategizing, sequencing is of critical importance, and so is the understanding of the time that it takes for manual processes at financial institutions and charities. The order of operations determines your tax outcome and getting it wrong can permanently eliminate the tax benefit that you could have otherwise enjoyed. The difference is whether it costs you hundreds or even thousands of dollars, or saves you hundreds or even thousands of dollars.
Wealth is always In Formation and the quality of the information that you receive and act upon determines your long-term financial success, particularly to the timing of QCDs, which is why we advise that you get them done early.
LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com. The WealthInFormationLady.com or SchulferAndAssociates.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
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