Do QCDs Still Make Sense in 2020?

With changes to the SECURE Act, the CARES Act and the pandemic, do qualified charitable distributions still make sense?
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Qualified charitable distributions, or QCDs, offer retirement savers taking required minimum distributions from their IRA account the opportunity to divert those RMDs to a qualified charitable organization. This eliminates the federal taxes due on RMD and provides a tax-efficient way for retirement savers to donate to charity.

With the waiver of RMDs in 2020 due to the COVID-19 do QCDs still make sense in 2020? For financial advisers, the answer will vary based on a client’s situation.

QCDs and the SECURE Act

The SECURE Act raised the age at which RMDs commence to 72 for those who had not yet reached age 70½ before Jan. 1, 2020. However, this change did not impact the age at which an IRA account holder can utilize QCDs. That remains age 70½.

What this means is that as early as age 70½, clients can take distributions from their traditional IRA account and divert up to $100,000 of those distributions to a qualified charitable organization. The benefit of using a QCD is that these distributions are not subject to taxes as a normal IRA distribution would be. The contribution is not eligible for a charitable deduction, however.

For those retirement savers who are charitably inclined and who don’t need the money from their RMDs, this can be a tax-efficient way to make charitable contributions. This is especially relevant for those clients who are not able to itemize their deductions for tax purposes.

QCDs and IRA Contributions

A new feature under the SECURE Act is the ability for savers who have earned income at the age of 70½ or beyond to make pre-tax contributions to a traditional IRA if they qualify. This can offer a way for them to continue to accumulate money for retirement and also offer an additional way to reduce their current year taxes a bit.

To prevent people from making a pretax contribution to an IRA and then turning around and using this contribution for their QCDs, the amount of any pre-tax IRA contributions made past age 70½ will be deducted from the amount eligible for QCD treatment. This is cumulative, not just the amount of the pre-tax IRA contribution for a given tax year.

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QCDs and the RMD Waiver

As if the changes due to the SECURE Act weren’t enough to digest for 2020, the CARES Act was passed to provide relief to individuals and businesses in the wake of the economic impact of COVID-19.

One of the provisions of the CARES Act was the waiver of virtually all RMD requirements for 2020. QCDs are still allowed, however. So any IRA distributions within the $100,000 limit can still be treated as a QCD with the advantage of the withdrawal not being subject to taxes.

Deciding if a QCD Makes Sense in 2020

Determining whether a QCD still makes sense for eligible clients in 2020 will vary on a case-by-case basis.

A QCD will likely still make sense for those who would normally go this route, especially if they don’t normally use the money from their RMDs to fund their living expenses in retirement. For those who want to contribute to one or more charities, this is still a tax-efficient way to do so.

In addition to the reason above, it might also make sense for clients who want to reduce the amount of RMDs in subsequent years. An IRA distribution will help accomplish this as this amount will not be in the account at the end of the year and will not be included in the amount subject to an RMD for 2021.

For those clients for whom reducing future RMDs is a priority, advisers might consider having them do both a QCD and a Roth conversion on some or all of the money left in the IRA. Roth conversions can make a lot of sense especially in 2021 with income tax rates at historically low levels. Who knows what the future might hold for tax rates?

The QCD might not make sense in a scenario where a client holds appreciated securities in a taxable account. It might be more tax-efficient to donate these assets if by doing so they will be able to itemize deductions. Beyond the ability to itemize, this allows them to avoid capital gains taxes on these securities if they sell them outright at some future date. Again the advantage in that part of the strategy will be determined based on the direction of capital gains tax rates in the future.

QCDs are a solid planning tactic for clients who are normally subject to taking RMDs for their traditional IRA accounts and who are also charitably inclined. The landscape for 2020 adds a few more variables to the equation in terms of helping clients decide if this a good strategy for them this year.