Avoid common errors with Qualified Charitable Distributions (QCD) and learn about donor-advised fund rules to give efficiently to the causes you care about.
2024 Charitable Giving: Qualified Charitable Distributions and Donor Advised Funds
As we approach the end of 2024, many individuals are looking for effective ways to manage their retirement savings while also supporting their favorite charities. One of the most beneficial strategies available are Qualified Charitable Distributions (QCDs) and Donor Advised Funds (DAF). QCDs allow IRA owners to make charitable donations directly from their IRAs, offering significant tax benefits and fulfilling required minimum distributions (RMDs). A donor-advised fund is a charitable giving account established at a sponsoring organization, which can be a public charity or a community foundation. Donors contribute assets such as cash, stock, or mutual funds to the DAF and receive an immediate tax deduction for their charitable contribution.
This article will review the differences between the donation options as well the rules for each and what common mistakes to watch out for.
Last Minute QCDs and DAF Contributions for 2024 Tax Year
While a DAF is a type of account for charitable giving purposes, a QCD is a type of withdrawal from an IRA that goes directly from the retirement account to a qualified charitable organization. However, both DAF contributions and QCDs have to be made by the end of the calendar year in order to count for that tax year. Therefore, the deadline is quickly approaching for the 2024 tax year.
Work with a Financial Advisor to Meet Last Minute Tax Deadline
There is a lot to consider when deciding to either make a QCD or open a DAF, especially during crunch time. For a DAF, donors can enhance their charitable giving by employing strategies such as timing their contributions to coincide with high-income years, donating appreciated assets to minimize capital gains tax, and diversifying their grant recommendations to support a range of causes. By carefully planning their contributions and distributions, donors can maximize the impact of their philanthropic efforts while optimizing their tax benefits. QCDs, on the other hand, offer a strategic way to reduce taxable income, especially for those subject to RMDs. A financial planner can help walk you through your choices to ensure you’re making the right choice for your financial goals.
A PlanWell Advisor Can Help! Schedule a Free Consultation.
What is a Qualified Charitable Distribution (QCD)?
Simply put, a QCD is a direct transfer of up to $105,000 per year ($108,000 for 2025) from your traditional IRA, SEP IRA (inactive), or SIMPLE IRA (inactive) to a qualified charity without incurring income tax on the distributed amount. This differs from standard IRA withdrawals, which are typically taxed as ordinary income. You avoid paying taxes on the withdrawal because the distribution is made directly from your IRA to the charity. The pre-tax amount is given directly to the charity. Since charities do not pay income taxes, they receive the entire amount tax-free. It is a win-win for you and the charity.
Benefits of Making a QCD
- Reduce your taxable income: By excluding QCDs from your taxable income, you can lower your tax bracket and minimize your tax burden. This can be particularly beneficial if you’re subject to mandatory minimum distributions (RMDs) starting at age 73.
- Maximize your charitable giving: By avoiding taxes on the distributed amount, you effectively give the charity a more significant gift. This allows you to contribute more without impacting your own financial reserves.
- Fulfill RMDs tax-efficiently: For individuals at least 73, QCDs can count towards satisfying your RMD requirement for the year. This offers a strategic way to fulfill your RMD obligation while simultaneously supporting worthy causes.
- Simplify your tax return: QCDs eliminate the need to itemize deductions for charitable contributions, potentially streamlining your tax filing process.
What are the Requirements and Rules for Qualified Charitable Distributions?
To qualify for QCDs, you must meet the following criteria:
- Age Requirements: Be at least age 73 or older at the time of the distribution.
- Types of IRAs eligible for QCDs: Own a traditional IRA, inherited IRA, SEP IRA (inactive), or SIMPLE IRA (inactive).
- Qualified Distribution method: Transfer the funds directly from your IRA custodian to the qualified charity. Personal withdrawals followed by donations don’t qualify.
- Annual limit: The maximum annual QCD for an individual is $105,000, regardless of the number of charities supported. Married couples can each make QCDs up to the $105,000 limit, potentially bringing the combined total to $210,000.
What Are Common Mistakes to Avoid When Making a QCD?
Ensuring Your Donation Meets IRS Requirements
To avoid common mistakes when making a QCD, it is essential to ensure that your donation meets all IRS requirements. This includes verifying that the charity is a qualified charity and that the distribution is made directly from the IRA to the charity. Failing to meet these requirements can result in the distribution being treated as a taxable IRA withdrawal, negating the benefits of the QCD.
Avoid QCD to Donor-Advised Funds
Although a Donor-Advised Fund (DAF) is a qualified charity, you cannot use a QCD to fund your DAF. If you’re interested in exploring QCDs, consult with your financial advisor, IRA custodian, and your tax advisor. They can guide you through the process, ensure compliance with relevant regulations, and help you make informed decisions that align with your financial goals and charitable aspirations.
Knowledge is Confidence!
What are Donor-Advised Funds?
At its core, a Donor-Advised Fund is a charitable giving vehicle that allows donors to make contributions, receive an immediate tax deduction, and then recommend grants to qualified nonprofit organizations over time. It’s like having your own personal charitable account, offering both flexibility and impact.
Advantages of a Donor-Advised Fun
· Simple Setup: Establishing a Donor-Advised Fund is straightforward. You can create an account with a sponsoring organization, which could be a community foundation, financial institution, or other qualified charitable organization.
· Tax Advantages: When you contribute to a Donor-Advised Fund, you’re eligible for an immediate tax deduction. This deduction can be especially advantageous during high-income years. However, remember that the tax deduction are only available on the year you gave to a DAF. Future allocations from the DAF to other charities are not eligible for deductions.
· Strategic Giving: DAFs empower you to take a strategic approach to giving. Instead of making one-off donations, you can contribute to the fund and then decide how to distribute the money to various nonprofits over time. This flexibility allows you to plan your giving based on changing circumstances or new causes you want to support. Note: over 1.4 501(c)(3) charities in the IRS database are eligible. However, private foundations, crowdfunding campaigns, and political groups are generally not eligible.
· Anonymity, if Desired: Some DAFs offer the option of anonymity. If you prefer not to disclose your identity to the nonprofits you support, a DAF can serve as an intermediary, adding a layer of privacy to your philanthropic efforts.
· Investment Growth: The funds in your DAF can be invested, potentially allowing them to grow over time. This growth means you’ll have more resources available for charitable giving in the future.
· Simplified Recordkeeping: Donor-Advised Funds handle administrative tasks such as recordkeeping, disbursements, and tax receipts. This simplifies the giving process, allowing you to focus more on the impact you want to create.
· Access to Expertise: Many DAF sponsoring organizations have experienced staff who can offer insights into effective giving strategies, philanthropic trends, and nonprofit performance. This expertise can help you make more informed decisions about where to direct your donations.
Potential Drawbacks of Using a DAF
While donor-advised funds offer numerous advantages, they also come with certain drawbacks that donors should consider when evaluating their philanthropic options.
Minimum Contribution Requirements
Different DAFs have varying minimum contribution requirements. Be sure to research and choose a fund that aligns with your budget and philanthropic goals.
Other Aspects of Donor-Advised Funds
One limitation of using a DAF is the lack of direct control over the investment fund, as the sponsoring organization manages the assets. Additionally, while donors can recommend grants, the final decision rests with the sponsoring organization, which may not always align with the donor’s preferences. These factors can limit the flexibility and autonomy that some donors seek in their charitable giving.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we are federal employee financial advisors with a focus on retirement planning. Learn more about our process designed for the career fed.
Preparing for federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars here! Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Want to have PlanWell host a federal retirement seminar for your agency? Reach out, and we’ll collaborate with HR to arrange an on-site FERS seminar.
Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting here.
