Mega Qualified Charitable Distributions: Now or Never
Learn about qualified charitable distributions and their "mega" version, only available this year.
Christine Benz: Hi, I'm Christine Benz from Morningstar. For charitably inclined older adults, a qualified charitable distribution often beats making a charitable contribution and deducting it on your tax return. Joining me to discuss the QCD, as well as what he calls the mega QCD, is author and tax-planning expert Ed Slott.
Ed, thank you so much for being here.
Ed Slott: Great to be back with you, Christine. Thanks.
Benz: It's always great to have you here. I want to talk about the qualified charitable distribution. Can you start by outlining what that is?
Slott: It's one of my favorite provisions of the tax code--QCDs, qualified charitable distributions. It's a way for people who give to charity anyway to get a tax benefit. Remember, most people don't get the tax benefit they used to since the law changed a few years ago, and most people don't itemize, and they take a standard deduction. So this is good for people that have IRAs and to get that money out, literally, at zero tax, which you can't do better than that. Actually, the only negative about QCDs is that it doesn't apply to enough people. It only applies to IRA owners and IRA beneficiaries who are 70.5 years old or older. Now, that's not an error. Even though the Secure Act raised the required minimum distribution, RMD, age to 72, it did not affect the QCD age. And here we are--we're getting into all these acronyms. It's like a different language.
So you have this gap between 70.5 and 72 before RMDs begin that you can still do the QCDs. And what is involved there? It's a direct transfer. In other words, you notify your custodian, whoever it is, to move your IRA money directly from your IRA to your chosen charity direct--it doesn't come out to you, it goes direct to the charity--and it's not included in your income. Where normally a distribution from an IRA would be included in your income. Now you don't get a deduction per se, because you're not itemizing deductions, but you're getting better than a deduction. You're getting an exclusion from income--that's better than a deduction because it lowers your adjusted gross income, AGI, another acronym. And that's a key number on the tax return that determines the amount of benefits, deductions, and credits that you may be entitled to.
Benz: You reference that there's this disconnect: The QCD age is 70.5; the RMD age is 72. So why might someone who's 70.5 want to consider this maneuver before RMDs actually commence?
Slott: Well, to get a tax benefit out of donations you might make. And this is the people--I'm not saying to make donations just to get a tax benefit. If I was saying that, then give all your money to charity, and you'll never have a tax. But I'm talking about for making the gifts you're going to make anyway. We're so entrenched in this habit of writing a check to the charity, and most people don't realize, still, they're not getting any tax benefit for it because they're not itemizing their deductions. So if you're giving to charity anyway, why not take it from an IRA? Remember, an IRA is a pretax account. It's money that has not yet been taxed. This is the best money on earth to give to charity because it's loaded with tax. So if you're giving anyway, and you qualify-- remember, it doesn't qualify if you're in a 401(k) or another company plan--only from IRAs and you actually have to be 70.5. If you're 70.5 tomorrow, you can't do it today, you actually have to be 70.5, but it goes right to the charity and it's not included in income. Now, when you hit RMDs, some people use that to offset the income from their required minimum distribution.
Benz: You coined a term called mega QCD. Can you talk about what that is? Some people who are familiar with the retirement planning rules are familiar with the mega backdoor Roth IRA. What's the mega QCD?
Slott: I made that up because everybody likes anything that has a tax benefit with the word mega in front of it. You know, whatever it is, I want mega. So I made up the mega QCD. It's actually an anomaly that's ending at the end of this year due to a couple of tax laws. The QCD I just talked about, again only available to IRA owners, 70.5 or older, but there's another limit. You can only do--and this is enough for most people--but annually you're limited to $100,000 a year. What if you wanted to make more or what if you don't qualify for a QCD? Maybe you're only 50 years old. Maybe your money is in a 401(k). There's a provision that's ending. It came in one of the laws late last year, in one of these stimulus packages, that says: If you itemize deductions-- now, before I said, most people don't itemize because they don't have enough deductions to go higher than the standard deduction, but what if you really want to give a lot to charity and you itemize? Cash gifts are deductible, only through the end of this year, 100%, up to 100% of your AGI, your adjusted gross income.
So, here's the mega QCD. You could take from your IRA. Let's say you want to give $1 million for some reason. You have a multimillion dollar IRA, and you want to give to charity. And I said, the IRA is the best money to give to charity. It's loaded with taxes. You could take $1 million out of your IRA--now that's a taxable distribution. It's going to add $1 million to your AGI. But now that your AGI is higher, you could give $1 million to charity to virtually offset the income on that IRA distribution and way bypass that $100,000 limit. Actually, you could do the QCD if you qualify, plus the mega QCD.
Who benefits from this? People who don't normally qualify for the QCD because maybe they don't have an IRA. Maybe they only have a 401(k). This would work from a 401(k) if you're eligible for a distribution. Or maybe they're not 70.5. Somebody watching now says, "You know, I'm 65. I like to give to charity. I wish I could have that IRA deal. But I'm not 70.5 yet." You don't have to be for this. You can take money out of your IRA. It works a little differently; it will be added to your AGI. But then you could deduct that amount, and if it's large enough, it will bring you over to qualify for an itemized deduction over the standard deduction amount.
It's kind of an anomaly only for this year, because that 100% limit, which came out of the stimulus bill, one of them, ends this year, and it goes back to a different limit. So it's only available for the rest of this year. But if you like to give to charity and you want to use the best assets there are to give with--taxable assets like 401(k)s or IRAs--this is the way to really mega your QCD. So that's why I called it the mega QCD. Now you made it official by Morningstar bringing it to everybody's attention.
Benz: Right. You referenced age 50, Ed. Can you talk about if someone's withdrawing from a 401(k) or an IRA…
Slott: Yeah, yeah, I'm glad you mentioned that. I said age 50. Forget that. Right. Don't do this before age 59.5 because you might have a 10% penalty. Excellent point. Yeah, I was getting carried away there! Yeah, only 59.5 or older because if you take from an IRA or 401(k), you may have a 10% penalty. That's a deal breaker to me because that's money going in the garbage. You never want to pay a 10% penalty. You also, another caution, don't do it from a Roth IRA. There's no tax benefit there. You already paid the tax. Good point. So scratch that, what I said before. If I used age 50 as an example, I should have said 60, 59.5, but that's a great point. Don't do it before 59.5.
Benz: But do act in 2021 because this window is closing within the next several months.
Benz: Ed, thank you so much for being here to discuss the QCD and the mega QCD.
Slott: Now it's official. Thanks.
Benz: Thank you. Thanks for watching. I'm Christine Benz from Morningstar.