We have clients that give to a broad range of charitable organizations and there are a number of ways to give based on your personal financial situation. However, some strategies could lead to substantially more funds going to your favorite charity than if you simply write a check. In order to understand which strategy works best for each situation, we typically ask clients to put together their list of charities and amounts they'd like to give for the upcoming years.  Then we review with them the most efficient way to make the donations.

One key giving tool now available to some donors is the Qualified Charitable Distribution, or “QCD.” A QCD is a donation to a qualified charitable organization that goes directly from your IRA account to the charity. Since the donation goes directly to the charity from the IRA (not from the IRA - to the individual – to the charity), the amount is not counted as taxable income to the individual. If you have a balance in an IRA account and are over the age of 70 ½, a QCD is now allowed for up to $100,000 per year. You may have heard reference to this strategy in the past, but prior to the QCD being made permanent in 2016 it was unclear if this would be available year to year.  For example, in 2011 QCDs were only approved in the last two weeks of the year.

 Why is the QCD such a great opportunity for clients who are charitably inclined? Once you reach age 70 ½ you are required to make a taxable distribution (Required Minimum Distribution, or “RMD”) from your IRA and other pre-tax retirement accounts. For example, for a 72 year old individual with a $1.5mm IRA balance this means a RMD of roughly $58,593 needs to be made within the calendar year. If this same client were to take the RMD as a distribution to themselves they would owe income tax based on their tax rate.

If they then turned around and made a gift to a charity they would receive a taxable deduction for the gift, but due to “phase out rules” that impact itemized deductions, they may not receive a deduction that equals the taxes owed on the RMD. In most cases, it likely would be better to not incur the taxable income, and instead have the funds go directly from the IRA to the charity.

As mentioned previously, the individual is required to make a RMD from their IRA of $58,593. If the same individual is charitably inclined and instead gives this amount as a QCD to their favorite charities, this satisfies their RMD for the year. You could then also give an amount above your RMD, up to a total of $100,000 per year, or an additional $41,407 based on the example.

We asked a partner in a Seattle area CPA firm about  the impact of using a QCD for gifting:  “While each client situation is unique, it is possible that a client with very high income and low tax deductions, who utilizes a QCD to gift $100,000, could benefit by up to 30% – or $30,000 more going to their desired charity for the same $100,000 IRA gift.”

There are other gifting strategies that may also result in giving more to your favorite charity with your same gift budget, such as giving highly appreciated assets like stocks or real estate, or creating a Donor Advised Fund (“DAF”).  A DAF allows individuals to claim a tax deduction in the current tax year on the entire amount contributed to the DAF, even if donations to charities then occur over future tax years.  Unfortunately, a QCD cannot be made to a DAF account, but must be made directly to a charitable organization. Also, even if you are over 70 ½ you cannot make a QCD from a 401k account – the funds must be first rolled to an IRA and then the QCD strategy can be utilized.

As each individuals’ circumstances are unique, we recommend that they first determine the amount and recipients or their annual giving, then work with their Financial Advisor and tax professional to determine the most efficient way to give. For some charitable clients a QCD may be an ideal solution, resulting in a significantly larger gift to favorite charities for the same gift dollars.


IMPORTANT DISCLOSURES Nothing in this article is intended to provide, and you should not rely upon it for, accounting, legal, tax or investment advice or recommendations. We are not making any specific recommendations regarding any financial planning or philanthropic giving strategy, and you should not make any financial planning or giving decisions based on the information in this article. The intention of this article is educational and it is intended only to discuss a few limited aspects of philanthropic giving using general examples that are not specific to any specific person. This article is not a comprehensive or complete summary of considerations regarding its subject matter. Each individual is in a different situation and has different items to address, and the options in this article are not appropriate for everyone. Please consult your Freestone client advisor and a lawyer regarding options specific to your needs.