Age Restriction on Qualified Charitable Distributions Limits Inherited IRA Gifting

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In December 2015, Congress passed a law allowing you to give up to $100,000 to charity directly from your individual retirement account (IRA) when you are over 70½ years old without counting the distribution as taxable income. This type of charitable gift is called a Qualified Charitable Distribution (QCD).

The intent is that charitably-inclined retirees can gift all or some of their required minimum distribution to charity and not be taxed on the distributed gift.

QCDs are allowed from any IRA other than a SEP or SIMPLE IRA, which means you can make a QCD from your Inherited Traditional IRAs RMD. At first thought this seems to open wonderful tax planning strategies for the charitably-inclined young heir, but alas, according to IRS Pub. 590-B, “You must be at least age 70½ when the distribution was made.”

This means no one younger than 70½ can make a Qualified Charitable Distribution. Furthermore, if you want to make a QCD as a part of your first RMD, you need to be careful. You must be at least 70½ to have the distribution count as a QCD, so you will need to wait until 6 months after your birthday to make the distribution.

The IRS created this age restriction because without it, you could float all your charitable giving through your IRA (or 401(k) plan to IRA Rollover) every year and not pay tax on any of it or its growth. With the age restriction, you can only give to charity after you are no longer allowed to contribute to your traditional IRA.

As we have said before, most charitably-inclined investors can experience more tax savings by making donations from appreciated stock in their taxable accounts than by QCD donations. Such stock donations experience double tax savings. Not only does the gift count as a deduction, reducing taxable income, but also the donation avoids paying the state and federal capital gains tax you would have owed had you sold the stock.

Those who benefit the most from QCD giving from an IRA are those who are in the 0% federal capital gains tax bracket and thus would not benefit the second savings from gifting appreciated stock. Unfortunately the age restriction makes the charitably-inclined young, who are more likely to be in the 0% capital gains bracket, unable to make QCDs.

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine