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December 2023

Qualified Charitable Distributions – Planning for QCDs in 2024

The basic planning rule is, a QCD must be made from an IRA. A QCD cannot be made from a profit sharing plan, 401(k) plan or other employer sponsored plan.

Many individuals age 701/2 or older may be considering making a qualified charitable distribution (QCD) or may know they want to make a QCD. Many of the laws governing IRAs are set forth in Code section 408. Code section 408(d)(8) authorizes an IRA accountholder to make a QCD if certain rules are met. The basic rules are: the IRA custodian must make the check payable to the charity, the aggregated IRA distribution amount must be $100,000 or less, the individual IRA accountholder or beneficiary must be age 701/2 or older and the individual donor must get a tax receipt from the charitable organization confirming the contribution before filing their income tax return. The IRS on November 16, 2023 issued newswire IR-2023-215 discussing QCDs.

What tax benefits does a person receive when she or he makes a QCD?
The person receives two tax benefits for one transaction. This is rare under the federal income tax laws. For discussion purposes Alexa Taxpayer, age 78, has an IRA with a balance of $600,000. She has made 3 QCDs totaling $50,000 in 2023. She instructed her IRA custodian to send a check for $20,000 to Michigan State University, a check for $20,000 to her church and a check for $10,000 to the Salvation Army. Alex’s RMD for 2023 is $27,273.

Her first tax benefit is, she is not required to pay taxes on the $50,000 because she excludes the $50,000 from her income.

Her second tax benefit is, she is not required to withdraw her RMD of $27,273 and include it in income and pay the applicable income tax because the IRS has ruled a person’s QCD counts towards the person’s RMD for that year.

Does the law authorize a 401(k) participant or a profit sharing plan participant to make a QCD?
The answer is no. A 401(k) or profit sharing participant is ineligible to make a QCD. Common sense says that the law should be changed so that a profit sharing plan participant or a 401(k) participant is eligible to make a QCD if he or she is age 701/2 or older but that is not the current law. A profit sharing plan participant or 401(k) participant who wants to make a QCD must directly rollover their 401(k) funds into an IRA and then make the QCD. Remember, an RMD is ineligible to be rolled over. So, the direct rollover needs to completed by December 31, 2023 if the QCD will be made in 2024.

A 401(k) participant may make a charitable contribution under the laws set forth in Code section 170, but the tax benefits realized are more limited. If Alexa’s balance in a 401(k) plan was $600,000 she would be required to withdraw her RMD of $27,273. She would include that amount in her income. If she made charitable contributions to her three charities she would be able to claim some deductions for her charitable contributions. The IRS has written Publication 526 (Charitable Contributions) The amount which a person is able to deduct is not 100%. There are various limits (15%, 30%, or 60%) which apply and which reduce the amount which can be deducted. IRS Publication 526 (Charitable Contributions) discusses charitable contributions in detail.

These two transactions - QCDs and Charitable Contributions sound a lot alike, but they are two separate and different transactions having different tax consequences. QCDs provide a much greater tax benefit than a charitable contribution which is deducted.

In summary, a person needs to move his or her funds in a profit sharing plan or 401(k) plan into an IRA by December 31, 2023 if the individual wishes to use those funds to make a QCD in 2024. The amount one pays in income taxes will be substantially reduced by making a QCD. To do so the funds need to be in IRA. A QCD cannot be made from funds in a 401(k) plan or other qualified plan.

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