Alphabet Soup: Why Do a QCD When There Is No RMD?

Gift planning doesn’t have to be technical or difficult to understand. Nonetheless, there are some abbreviations that may seem arcane. Here are some abbreviations that can help you raise more money in 2020!

QCD and RMD

One of the most appealing features of a qualified charitable distribution (QCD) is that the QCD satisfies the donor’s required minimum distribution (RMD.) However, the RMD requirement has been suspended for 2020. Why would anyone do a QCD if they have no RMD? The short answer is, a QCD offers the benefit of an itemized income tax charitable deduction even if the donor takes the standard deduction and does not itemize and is not subject to the RMD. Too many initials? Let me explain.

QCD stands for Qualified Charitable Distribution, sometimes referred to as a charitable IRA rollover. Most gift planners and other fundraisers know about the QCD. This allows an owner of a traditional or Roth IRA who is 70 ½ or older to make direct transfers from their IRA to charity at no tax cost (401(k)s and other qualified contribution retirement plans are not eligible). The QCD can be as much as $100,000 per taxpayer per year and is not included in the donor’s income. It gets even better, the QCD helps the donor satisfy their RMD without increasing their taxes.

A Required Minimum Distribution (RMD) is the amount of money the owner of a traditional IRA, SEP, or SIMPLE individual retirement account (IRA) must withdraw from their plan during the year. RMDs start in the year the owner turns 72 and equal a prescribed fraction of the plan balance at the end of the previous year. The older the owner, the larger the fraction of the plan balance the owner must withdraw.

Why QCDs and Why Now?

The $2 trillion coronavirus emergency stimulus package passed into law in March, 2020 suspended the required minimum distributions from retirement accounts in 2020. If a retiree isn’t required to take money out of their IRA for 2020, why would they use a QCD to make a gift to charity?

A law passed in 2018 nearly doubled the standard deduction and eliminated or restricted many itemized deductions in 2018 through 2025. The net result is that the number of households claiming an itemized deduction for their charitable gifts fell from about 37 million to about 16 million. Millions of Americans now receive no tax benefit from their charitable deductions because they no longer itemize.

Donors making modest annual gifts consistently over many years are the core of the planned giving pipeline. The Tax Policy Center concluded that after doubling the standard deduction there has been a reduction in the average gift from those making gifts of $1,000 or less. Also, charities have observed a reduction in the total number of donors making annual contributions.

Maintain this important source of planned givers by encouraging annual gifts from non-itemizers via the QCD. IRA administrators typically do not require a minimum amount to complete a QCD. Millions of donors no longer itemizing can still make a QCD and receive the tax benefit of an itemized deduction without having to itemize their deductions. For that reason, a QCD makes sense for many retirees even though they are not subject to an RMD in 2020.