By Marc C. Shaffer
For many of our clients, giving back is a core part of their values, and we love that. Whether it’s a cause close to your heart or an organization that’s been part of your life journey, charitable donations can be a meaningful way to create impact.
If you’re age 70½ or older and own a traditional IRA, there’s a powerful tool that can help you give directly and tax-efficiently: the Qualified Charitable Distribution, or QCD.
What Is a QCD?
A Qualified Charitable Distribution allows you to transfer up to $108,000 per year directly from your IRA to a qualified 501(c)(3) charity. This transfer counts toward your Required Minimum Distribution (RMD) and, best of all, it is excluded from your taxable income. That means you can support the causes you care about and potentially reduce your tax burden.
But here’s the catch: for the distribution to be “qualified,” it must go directly to the charity. If you withdraw the funds first and then donate them, it doesn’t count as a QCD, and the tax benefits disappear.
QCD Eligibility Age vs. RMD Start Age: What’s Changed?
It used to be that your eligibility to make a QCD lined up with the same age when you had to start taking Required Minimum Distributions (RMDs). That’s no longer the case.
- You can start making QCDs at age 70½.
- However, due to recent legislation changes (such as the SECURE Act and SECURE Act 2.0), the RMD start age has moved back, from age 70½ to age 73, and even to age 75 for some individuals born in 1960 or later.
This means you can use a QCD before you’re required to take an RMD. It’s a great way to begin charitable giving directly from your IRA, even if you aren’t yet mandated to withdraw funds. Just keep in mind that the funds must come from a traditional IRA and go directly to a qualified charity to receive the tax advantage.
Why Schwab’s IRA Checkbook Option is a Game-Changer
Here at Searcy Financial Services, many of our clients have chosen Charles Schwab as their IRA custodian. One of the biggest conveniences Schwab offers is the option for clients to receive a checkbook linked directly to their IRA. This might seem like a small thing, but it makes a big difference when it comes to QCDs.
With the IRA checkbook in hand, our clients can:
- Write checks directly to charities, simplifying the QCD process.
- Make multiple smaller donations throughout the year without needing to fill out forms or make formal distribution requests.
- Retain control over the timing and amount of each donation, ideal for folks who enjoy supporting a variety of organizations.
For many, this ease of use encourages more frequent and intentional giving.
Important Timing Consideration: When the Check Clears Matters
Here’s something important that many people don’t realize: a QCD is only counted in the year the check is cashed by the charity, not when you write it. This can cause confusion, especially for clients using Schwab’s IRA checkbooks.
If you write a check in December and the charity doesn’t cash it until January, it will count as a QCD for the new year, not the year you wrote it. That’s usually no big deal unless you’re counting on that donation to satisfy your Required Minimum Distribution (RMD) for the year. In that case, a delayed deposit could leave you short of your RMD requirement and potentially subject to penalties.
If the timing is critical, especially toward the end of the year, we recommend going through the traditional QCD process by submitting paperwork for Schwab to send the check directly to the charity. Once Schwab processes and sends the funds, the distribution is counted for that tax year, regardless of when the charity deposits the check.
Why QCDs Became Even More Valuable After the Tax Law Changes
A few years ago, the Tax Cuts and Jobs Act significantly increased the standard deduction, making it less likely that many taxpayers, especially retirees, would itemize deductions on their returns. While this simplified tax filing for many, it also had an unintended consequence: fewer people were able to deduct their charitable donations.
If you’re not itemizing, charitable gifts don’t give you a tax benefit, at least not in the traditional sense. That’s where Qualified Charitable Distributions (QCDs) come in as a game-changer.
With a QCD:
- You don’t need to itemize to receive a tax benefit.
- The amount donated via a QCD is excluded from your taxable income, effectively lowering your adjusted gross income (AGI).
- This reduction in AGI can potentially help in other areas too, like lowering Medicare premiums or reducing taxes on Social Security benefits.
In short, a QCD lets you have the best of both worlds: you can take the higher standard deduction and still receive a tax benefit for giving to charity, something many of our clients were doing already out of generosity and habit.
Documentation Is Key, No Matter the Method
Whether you’re using the IRA checkbook or going through Schwab directly, it’s essential to keep clear records:
- Make copies of each check and note the date it was written and the purpose.
- Request and retain acknowledgment letters from the charities, these should confirm the donation amount and state that no goods or services were received in exchange for the gift.
At least for now, Schwab does not provide a report detailing which checks written from the IRA checkbook were Qualified Charitable Distributions. That means the responsibility for documentation falls on you, the client. We strongly recommend keeping a simple spreadsheet or folder (paper or digital) with copies of each check and the corresponding donation acknowledgments. This not only makes tax time easier but also ensures that your giving is properly recorded and recognized.
Helpful Resource: QCD Eligibility Flowchart
To help you quickly determine whether you’re eligible to make a Qualified Charitable Distribution and understand the steps involved, we’ve included a helpful flowchart created by fpPathfinder. This visual guide walks you through the rules and exceptions step-by-step and is a great companion to this article. Be sure to check it out if you want a clear picture of how QCDs work.
Flowchart: Can I Do a Qualified Charitable Distribution From my IRA?
Giving Should Be Joyful, Not Stressful
At Searcy Financial, we believe charitable giving should be easy, impactful, and, most importantly, joyful. Whether you’re writing one big check each year or spreading your generosity across dozens of causes, tools like Schwab’s IRA checkbook can simplify the process. And when it comes to the timing and reporting, we’re here to guide you along the way.
If you’re interested in using QCDs for your charitable giving strategy, or if you’d like help navigating the process with Schwab, reach out. We’d love to support your generosity and help you make the most of the tools available.
And while QCDs are a great fit for many retirees with IRAs, they’re just one of several effective ways to give. Depending on your goals and the types of assets you hold, other strategies, such as donating appreciated securities or setting up a donor-advised fund (DAF), might be worth exploring too. Each has its own set of tax advantages and planning opportunities.
If you’re curious about those options, be sure to check out our other blog posts on:
- Should I Use a Donor Advised Fund (DAF) When Giving to Public Charities?
- What Type of Charitable Giving is Right for Me?
- Financial Gifts: What You Need to Know
Charitable giving should reflect both your heart and your financial wisdom, and we’re here to help with both.