Welcome back to Powering Your Retirement Radio. In this episode, I will explain the MEGA QCD and why the opportunity goes away on New Year’s Eve. QCD stands for Qualified Charitable Distribution. Thanks to America’s IRA expert Ed Slott for sharing this information in his Fall gathering of his Elite and Masters Elite Groups. I am a member of his Elite Group and find his training incredibly helpful.
A Qualified Charitable Distribution is available to anyone aged 70 1/2 and older. You have to be 70 1/2 when the distribution is done, not just in the year your turn 70 1/2. A QCD can satisfy the need to take an RMD (Required Minimum Distribution). Money withdrawn from an IRA that satisfies your RMD is made on a First Out basis. Meaning if you only want to take out the RMD and take out a portion in February and then decide to take more out later in the amount of your QCD, you can. Still, the first distribution will count towards the RMD, and then other money would come out – meaning you will have pulled out more than you needed to.
A QCD goes from your IRA directly to a charity. If done this way, the entire distribution amount is not taxable to you even though it came from your IRA. You will get a 1099 like usual, so you must inform your tax professional that you did a QCD to ensure it is reported correctly.
A MEGA QCD works just like a QCD, with one exception. Until December 31. 2021, a section of one of the Coronavirus Relief Bills allows you to deduct up to 100% of your AGI. Anyone can take advantage of this. If you are over 59 ½, you can take a distribution from an IRA without any penalties, but you have to pay income tax on the distribution.
If you are 60 years old and happen to have millions of dollars in an IRA, and you know you won’t spend all your money, you may have a charitable intent in the future. For example, imagine you decided you want to give $1,000,000 away, and your salary is $250,000 a year. Typically, you can only give up to 50% of your Adjusted Gross Income (AGI) away and take a tax deduction. However, until December 31, 2021, it is 100% AGI. So it would be $250,000.
If you know a little about a tax return, you know distributions from an IRA are taxable and add to your AGI. So, for example, if you made $250,000 and took a $1,000,000 distribution, your AGI would be $1,250,000 (ignore deductions, consult a tax professional familiar with your situation). So under the current rules, you could donate $1,250,000.
You can have the money sent directly from your IRA to the charity and not pay tax on it. If you were so inclined, you could empty your entire account, give it to a charity, and not owe any taxes.
Here is an extreme example: you would have to be sure you would never need the money. My suggestion and reason for bringing this up are that many people have charities they donate to and care about. I am a financial professional and have talked with several other professionals since I learned this information. Unfortunately, nobody I have spoken to was aware of this, including myself, until I took the Ed Slott training.
If you are involved in a charity, especially on the fundraising side, or know someone, this is something to share with them. Most charities have major donors that could do more but hate paying taxes. Until New Year’s Eve, that is not a concern, so mention it to people you know. It could help someone who might be willing to donate now if they could avoid the taxes. It could also help a charity make a difference.
I am happy to talk with anyone interested in this idea or to explain it to a charity if they want more information on the opportunity.