For clients who don’t need income, Required Minimum Distributions (RMD) can feel like a burden—including a tax burden. Industry data supports this trend. One study found that 84% of clients subject to RMDs withdraw only the minimum amount required, and 80% waited until their Required Beginning Date (RBD)—currently age 73—to begin distributions.1
What these clients may not understand is that RMDs may present an opportunity for strategic planning. Financial professionals can use Qualified Charitable Distributions (QCDs) to reposition and repurpose a portion of a client’s IRA into a platform for charitable giving, while also potentially satisfying their RMDs —a “win-win” strategy that clients may wish to embrace.
What are Qualified Charitable Distributions (QCDs)?
A QCD is a direct transfer from certain types of IRAs to a qualified 501(c)(3) charity.2 The charity can tell you whether they are qualified to accept a QCD. You can also search for qualified organizations at IRS.gov/TEOS.
These federally tax-free donations allow eligible retirees or those approaching retirement the opportunity to:
To qualify as a QCD, the donation must be purely philanthropic, with no personal benefit derived. For instance, if the contribution is used to pay for participation in a charity golf event, it would not be considered a QCD since participating in the event would be considered a personal benefit.3
Who can make QCDs? And what are the requirements and limitations for QCDs?
Here are the requirements for making a QCD:
- Clients must be age 70 ½ or older.
- They can donate up to $108,000 per year per IRA holder.4
- QCDs must be paid directly from an IRA to an eligible charitable organization.
- A QCD is not included in the client’s taxable income if properly reported.5
- To demonstrate proof of the charitable contribution, the client should consider keeping an acknowledgment letter from the charity, just like they would for any other charitable contributions.
- Notably, a client does not need to itemize deductions to take advantage of a QCD.
- If the QCD accounts for the first distribution from the IRA, it may also satisfy all or a portion of the RMD for the taxpayer.
A Hypothetical QCD case study:
Meet Ken, a 73-year-old retiree with sufficient retirement savings to support his lifestyle. As he begins taking his RMDs from his IRA, Ken realizes these withdrawals will increase his taxable income. Since he does not need the extra cash flow, he meets with his financial professional to explore ways to manage his tax liability.
Ken has not always engaged in charitable activities, but his financial professional knows that he is active in his community and volunteers regularly at a local animal rescue, a registered 501(c)(3) organization. During their discussion, Ken is introduced to the strategy of using a Qualified Charitable Distribution to satisfy all or part of his RMD. By directing his RMD to the rescue, Ken could meet some or all of his distribution requirement while avoiding the taxes normally due on the withdrawal.
As an added benefit, Ken has the flexibility to either change his charitable focus or retain the proceeds of his RMD each year if his goals change.
Here’s how he did it:
Product Selection:
Ken chooses a single premium fixed indexed annuity that offers growth potential for his retirement savings (without the risks associated with a down market) and has the ability to distribute his RMDs directly to an eligible charity.
Federally Tax-Free Giving:
By using QCDs, Ken would be able to lower his taxable retirement income. These distributions go straight from his IRA to his eligible charity of choice, making the charitable gift federally tax-free.
Leave a lasting legacy
Growing an Inheritance for Loved Ones
Ken may choose to be charitable during his lifetime, but he also wants to leave a legacy for his children and grandchildren. If Ken selects ForeAccumulation II fixed index annuity with the optional EDB6 rider, the Enhanced Death Benefit’s value will grow by 10% per year for up to 15 years or until age 90, whichever is sooner. The EDB will be reduced dollar-for-dollar by the RMD. This way, Ken can still provide an inheritance to his designated beneficiaries as part of his legacy plan.
Growing the Charitable Giving for Lasting Impact
Ken may wish to continue his charitable giving through his estate. When a client names a charity as a beneficiary to receive their IRA or other retirement assets upon their death, the benefits multiply:
- Neither the client nor their estate will pay income taxes on the distribution of the assets.
- The estate will need to include the value of the assets as part of the gross estate, but it may receive a federal tax deduction for the charitable contribution, which can be used to offset the estate taxes.
- The full amount of the retirement account will directly benefit the charity of choice.
- It is possible to divide retirement assets between charities and heirs according to any percentage the client chooses.
- Clients can support a cause they care about as part of their legacy.
Overall Impact
Through strategic planning, Ken could achieve his philanthropic goals while also leaving a significant legacy to his chosen charity. Considering a hypothetical worst-case scenario with 0% crediting, Ken would leave behind $491,488.7 This approach exemplifies how thoughtful retirement planning can magnify your charitable giving.
*Illustrated Values based on 0% index performance
Age | Withdrawals | Cumulative Withdrawals | Guaranteed Death Benefit | Total Value Provided Cumulative Withdrawals + Balance |
|---|---|---|---|---|
70 | $0 | $0 | $330,000 | $330,000 |
73 | $11,041 | $11,041 | $407,855 | $418,896 |
75 | $10,764 | $32,733 | $440,692 | $473,426 |
80 | $13,427 | $92,905 | $496,941 | $589,846 |
85 | $15,901 | $166,923 | $491,488 | $658,411 |
FOR ILLUSTRATIVE PURPOSES ONLY. ACTUAL RESULTS MAY VARY.
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