Best Practice for Qualified Charitable Distribution Checks

with No Comments

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 70 1/2 years old without counting the distribution as taxable income. This type of charitable gift is called a Qualified Charitable Distribution (QCD).

To fully count as a QCD, there are three factors that must be satisfied.

  1. A QCD must come from a Traditional IRA or an Inherited IRA where the beneficiary is over 70 1/2.
  2. The distribution must transfer directly to a qualified charity.
  3. You must receive a confirmation letter from the charity stating that no goods or services were received in exchange for the gift.

However, because your QCD must also count as all or part of your RMD, it means that your withdrawal needs to happen before December 31st.

When transferring from an IRA to a third party, most custodians want to cut a check to the charity and mail it. However, that means you are mailing a check directly to a qualified charity and hoping that they cash it before December 31st.

If you are doing your giving in December, what if the charity does not cash the check until January? Or what if your check gets lost in the mail? Suddenly, it might be the new year and, thanks to your generosity, you are stuck with a 50% penalty from not meeting your RMD in the proper year.

To protect yourself from this problem, we suggest that you make the check written out to the charity (fulfilling the “distribution must transfer directly to a qualified charity” requirement), but have your custodian mail the check to your address.

When you receive the check, scan it (so that you have a record that you tried to distribute it) before either hand delivering it (in the case of your local church, for example) or putting it in the mail to the charity.

This gives you the protection you need in the event that something goes wrong or the IRS gets confused.

As with any complicated tax saving strategy, there is a chance that, even if you follow these instructions perfectly, you may receive a paper audit from the IRS asking you to justify your return. If you choose to make a QCD, we suggest saving as much documentation as possible.

Photo by Joanna Kosinska on Unsplash

Follow Megan Russell:

Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.