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Using a QCD may significantly increase your tax savings under the new higher standard deduction. However, not everyone is eligible to do a QCD, and if you are, there are certain rules that apply.
What is a qualified charitable distribution (QCD)?
A QCD is a distribution from an IRA that goes directly to a qualifying charity and is not included in the taxable income of the IRA owner. A QCD cannot be made from an employer plan. A QCD can be up to $100,000 a year, per individual. Under the new tax law, QCDs are more valuable than ever.
1. Either an IRA owner or a beneficiary can do a QCD. The individual must be at least age70 ½ at the time of the transaction. Reaching age 70½ later in the year is not enough. Bothspouses can do a QCD when each spouse does the QCD from their own IRA.
2. A QCD can be made from an IRA, an inactive SEP or SIMPLE IRA, or a Roth IRA. Only pre-tax amounts can be used for a QCD, which makes the use of Roth funds veryunlikely. The QCD must be a direct transfer to a qualifying charity. A check payable tothe charity but sent to the IRA owner will qualify as a QCD, as will a check written from a“checkbook IRA” to a qualifying charity. If an IRA owner receives a check payable to themfrom their IRA and then later gives those funds to charity, that is not considered a QCD.
3. A charity must be a qualifying charity. It cannot be a donor-advised fund or a privatefoundation. A gift to a charitable gift annuity will also not qualify. A QCD to a charity where theIRA owner has an outstanding pledge will qualify and will not create a prohibited transaction.The QCD must satisfy all charitable deduction rules. If a distribution to a charity is more than$100,000, the amount over $100,000 is taxable to the IRA owner and is deductible on theowner’s income tax return. The excess amount cannot be carried over to a future tax year.
4. A QCD can satisfy a required minimum distribution (RMD). It is not limited to theamount of the RMD, but is capped at $100,000 a year. If an RMD is more than $100,000, anyamounts in excess of the QCD are taxable to the IRA owner.
5. The IRA custodian has no special tax reporting for a QCD. The QCD will be reportedon Form 1099-R as a regular distribution. The IRA owner will include the QCD amount on line15a of Form 1040. On line 15b, they will exclude the amount of the QCD and put the lettersQCD on that line. The amount of the QCD is thus excluded from the owner’s taxable income.The IRA owner also cannot take a charitable deduction for the QCD amount.
For more information on QCDs and other key areas of retirement planning, click here to contact the office nearest you.
Preparing for retirement can be overwhelming, and between tax, estate, insurance, and investment planning, some important aspects of your financial plan can be easily overlooked if you’re not working with a competent professional. A qualified financial advisor can help you ensure that all items are being considered, but not all advisors are created equal. So how do you decide who to work with?
With endless options available, choosing a financial advisor can be difficult. However, there are certain qualities to look for to help you narrow down your choices and make sure you find a qualified advisor that best fits your needs.
Why do you need a financial advisor? Today’s financial landscape is as complicated as ever. A good financial advisor can help you navigate this complexity so that you can make educated, informed decisions on what is best for you and your family.
1. Ask for references. Ask your CPA or estate planning attorney. In many cases, they already have a working relationship with a financial advisor. You should also consider asking friends and family members for a recommendation if they are in a similar stage of life and financial situation.
2. Don’t overemphasize credentials. It seems as though there are many credentials available to financial advisors. Some credentials require significant levels of education, passing scores on exams and adherence to strict codes of professional conduct. Many credentials, however, can be earned with virtually no effort or education at all. The bottom line is that the decision of what financial advisor to hire should be made based on more than just the letters after their name.
3. Find a specialist. The term “Financial Advisor” is highly generic and can be used to describe many different types of professionals in the financial services field. When shopping around, find an advisor who specializes in your area of concern. If you had a heart problem, would you rather see your family doctor or a cardiologist? The same principle should apply to your financial advisor.
4. Ask about education/training. Most financial advisors routinely participate in what are called “advanced training” classes. Many times these classes are heavy on sales training and light on “real” education. If you really want to know what your advisor has studied, ask to see the manual from the last educational conference he or she attended. If it has more sales information than technical information... Beware!
5. Don’t be afraid to get a second opinion. Your IRA, 401(k) or other retirement account may be the largest single asset you own. If you’re not sure about the advice you’ve been given, don’t be afraid to get a second opinion. If an advisor tells you that there’s no need for one, they’re probably not confident in the information and recommendations they provided to you in the first place.
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