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Qualified charitable distributions make a comeback

April 18, 2013

As part of the "fiscal cliff" tax compromise legislation passed on January 1, Congress reinstated taxpayers' ability to take required annual distributions from their IRAs and contribute those withdrawals directly to charitable organizations, treating them as tax-free distributions. It's a convenient way to satisfy IRA distribution requirements, support charitable causes, and receive a tax break all at the same time.

This provision, called the qualified charitable distribution (QCD) rule, technically expired on December 31, 2011. But thanks to the American Taxpayer Relief Act, taxpayers can take QCDs for all of the 2013 tax year. (There was a brief window for the 2012 tax year as well, but that opportunity ended on January 31, 2013.) It's unknown whether QCDs will remain an option beyond the end of 2013.

Need help?

PhoneVanguard retirement specialists can help you arrange qualified charitable distributions over the phone. Call 877-662-7447 on business days from 8 a.m. to 10 p.m. and on Saturdays from 9 a.m. to 4 p.m., Eastern time.

General guidance on the QCD rule

First, the basics of required minimum distributions (RMDs): If you're age 70½ or older, you generally must withdraw a minimum amount each year from your traditional IRAs (Roth IRAs are excluded) and employer-sponsored retirement plans. Failure to take your RMD by year-end could result in a stiff IRS penalty—50% of the amount you should have withdrawn. (Learn more about RMDs.)

Under the renewed QCD rule, beginning at age 70½, you can have all or part of your distribution made directly from your IRA to a qualified charity (up to $100,000 per taxpayer, per year). Unlike conventional RMDs, QCDs aren't subject to ordinary federal income taxes.

For example, suppose that in 2013 you are over age 70½ and you'd like to make a contribution to a local charitable organization. You may have your 2013 RMD made payable directly to the charity (provided it meets the IRS definition of a qualified charity), and then designate it as a qualified charitable distribution on your tax return. The qualified distribution will not be treated as taxable income by the IRS.

How to take advantage of the QCD rule

There are several considerations to keep in mind when deciding whether to take advantage of the QCD rule.

Alisa ShinAccording to Alisa Shin of Vanguard Asset Management Services, "individuals with charitable intent may want to consider an IRA charitable distribution for 2013. However, you should consider consulting with a professional advisor to determine from not only an income tax perspective but also an estate planning perspective how best to achieve your wealth and charitable planning objectives."

Other factors that can affect a decision to make an IRA charitable distribution include whether your charitable contributions exceed your otherwise deductible limit, whether you itemize deductions, the potential loss of tax-deferred growth on the amount distributed from the IRA, and the effect on the size of future RMDs.

Vanguard believes you're well served to approach charitable planning holistically, taking into consideration income tax implications, as well as estate and gift tax planning goals and objectives. As always, we recommend you consult a professional tax advisor for specific guidance on your personal situation.

Notes:

  • The information provided here is intended to be general and educational in nature and shouldn't be construed as a substitute for legal or tax advice. Please consult an independent legal and/or tax advisor for specific advice about your individual situation.
  • Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
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