QCDs: Five questions your donors may be asking
As you review your donor lists and plan 2024 cultivation activities, pay particular attention to donors you know are over the age of 70 ½. That’s because these donors are eligible to make what’s known as a “Qualified Charitable Distribution,” or “QCD,” to your organization’s endowment fund at the community foundation directly from the donor’s IRA.
You’ve likely heard a lot about QCDs because they are becoming a very popular financial and charitable planning tool. At the same time, QCDs are growing as the source of more and more confusion.
Here are answers to the questions donors might ask you about QCDs so that your team can be prepared to answer them. As always, please do not hesitate to reach out to the community foundation for assistance.
“Is an IRA (Individual Retirement Account) the only eligible source for Qualified Charitable Distributions?”
Short answer: Almost.
Long answer: An individual can make a Qualified Charitable Distribution directly to an eligible charity from a traditional IRA or an inherited IRA. If the individual’s employer is no longer contributing to a Simplified Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees (SIMPLE) IRA, the individual may use those accounts as well. In theory, a Roth IRA could be used to make a QCD, but it is rarely advantageous to do that because Roth IRA distributions are already tax-free.
“What is the difference between a QCD and an RMD?”
Short answer: Quite a bit! But a QCD can count toward an RMD.
Long answer: Everyone must start taking Required Minimum Distributions (“RMDs”) from their qualified retirement plans, including IRAs, when they reach the age of 73. RMDs are taxable income. The Qualified Charitable Distribution, by contrast, is a distribution directly from certain types of qualified retirement plans (such as IRAs) to certain types of charities. When a taxpayer follows the rules, a QCD can count toward the taxpayer’s RMD for that year. And because the QCD goes directly to charity, the taxpayer is not taxed on that distribution.
“Can a donor make a Qualified Charitable Distribution even if the donor is not yet required to take Required Minimum Distributions?”
Short answer: Yes–within a very narrow age window.
Long answer: RMDs and QCDs are both distributions that impact retirement-age taxpayers, and it would seem logical that the age thresholds would be the same. Under the SECURE Act, though, the required date for starting RMDs was shifted from 70 ½ to 72 and is now up to 73 (which is better for taxpayers who want to delay taxable income). A corresponding shift was not made to the eligible age for executing QCDs; that age is still 70 ½ (which benefits taxpayers who wish to access IRA funds to make charitable gifts even before they are required to take RMDs).
The IRS’s rules for QCDs are captured in Internal Revenue Code Section 408 and summarized on pages 14 and 15 in Publication 590-B in its FAQs publication.
“Can a donor direct a QCD to a fund at the community foundation?”
Short answer: Yes, if it’s a qualifying fund.
Long answer: While donor-advised funds are not eligible recipients of Qualified Charitable Distributions, other types of funds at the community foundation can receive QCDs. These funds include endowment funds established by nonprofit organizations.
“How much can a donor give through a QCD?”
Short answer: $105,000 per year.
Long answer: A Qualified Charitable Distribution permits a donor (and a spouse from a spouse’s own IRA or IRAs) to transfer up to $105,000 each year from an IRA (or multiple IRAs) to a qualified charity. So, a married couple may be eligible to direct up to a total of $210,000 per year to charity from IRAs and avoid significant income tax liability.
The community foundation is here to help you and your team tap into the potential of QCDs to grow your endowment fund. Please reach out! We’d love to talk about a QCD strategy for 2024 and beyond.
More love for your endowment
February–and early in the year in general–is a good time to make sure your plans are in place to grow your endowment. As you and your team work together to reach out to donors this month, consider the ways your endowment fundraising communications help you build the long-term relationships with donors that ultimately result in both current and planned gifts to your endowment fund at the community foundation.
Indeed, Valentine’s Day itself is an opportunity to truly reflect on “long term” commitments. Endowments, of course, are intended to last in perpetuity … and the earliest valentines go back to the 1400s when an imprisoned medieval duke sent one to his wife. That brings new meaning to “standing the test of time”!
Formalizing your organization’s endowment, especially through establishing an endowment fund at the community foundation, helps your organization attract donors’ investable gifts that can produce sustainable returns while the principal or endowed amount remains intact.
This quarter, make it a priority to remind your donors about the various ways they can give to your endowment fund at the community foundation:
–Gifts of highly-appreciated stock
–Gifts of life insurance
–Retirement plan beneficiary designations
–Qualified Charitable Distributions from an IRA (for donors who are over the age of 70 ½)
–Gifts of closely-held stock
–Gifts of real estate
–Bequest in a will or trust
–Charitable remainder trusts
–Charitable gift annuities
As always, the community foundation is here to assist with any type of gift to your endowment fund, whether the gift is simple or complex. Like relationships in your life, endowments need nurturing, and not just during Valentine’s Day month! The team at the community foundation welcomes the opportunity to help your endowment thrive in perpetuity.
What’s worth noting
Events are back! Yes, it’s true! If it feels like events are hot again, you are right! A recent OneCause study showed that 83% of charities are planning an in-person event for 2024, and one-third are planning a hybrid event. Check in with the team at the community foundation for ideas about how to include endowment fundraising in your event strategy.
Wealth transfer is happening. The wealth transfer hype continues, and the media seems to report new twists on a regular basis, including statistics about how Generation X’s and Millennials’ particular circumstances figure into the equation. The bottom line remains, though, that the next several years are critical to build and execute your endowment-building strategy. Please reach out to the community foundation for help with endowment gifts of complex assets, such as real estate, or tried-and-true gifts, such as highly-appreciated stock.
Cause marketing considerations. Interested in aligning with a business or a brand? Cause marketing is not for every organization, but if you do decide to venture in, be sure to brush up on the rules and legal issues. Cause marketing can be a good way to amp up your organization’s brand, and, with savvy planning, you can leverage the increased visibility to grow your endowment. Reach out to our team for ideas!