As more and more baby boomers surpass age 72 each year, the age for mandatory individual retirement account (IRA) distributions, they are confronted by the need to take a required minimum distribution (RMD) from their IRA annually—or pay a steep penalty.
If an IRA owner does not want their full RMD counted as income come tax season, they have the option to roll over up to $100,000 annually from an IRA directly to a qualifying charity. The distribution counts toward the RMD, but the assets are not recognized as income. This technique, known as a qualified charitable distribution (QCD)—or more colloquially, a charitable IRA rollover—is a well-established, easy, and popular way to give.
Many donors give their QCD directly to a qualifying nonprofit, providing the organization with immediate operational funding. This approach makes sense in the case of smaller annual QCDs, but if a donor is rolling over tens of thousands of dollars to charities in a given year, there might be more strategic options worth considering.
Current restrictions do not allow individuals to use a QCD to fund:
- Donor Advised Funds
- Private foundations
- Supporting organizations
- Charitable gift annuities
- Charitable remainder trusts
But several popular charitable giving vehicles can be funded with a QCD, including:
Designated Funds are a particularly popular tool for donors who provide consistent annual support to one or more organizations, as they are designed to distribute grants annually to the organization(s) the donor identifies when they create the fund. Funding can be distributed over a period of years or the fund can be invested so grants are paid in perpetuity.
When establishing a Designated Fund at The Columbus Foundation, the donor simply needs to decide:
- What to call the fund – for example, the Tom and Mary Smith Fund, the Smith Family Foundation, or Smith Family Fund for XYZ Charity
- Which nonprofit(s) the fund should benefit – and if there are multiple grantee nonprofits, determine whether grant amounts will be equal, or whether funds payout a certain percentage or dollar amount to Charity A vs. Charity B vs. Charity C, etc.
- The grantmaking term – funds can be spent down over a period of years or they can be set up as permanent endowed funds
From there, all the donor needs to do is instruct their IRA custodian to transfer a specific amount directly to The Columbus Foundation and alert their CPA come tax season. The gift amount is then excluded from income for federal tax purposes while still counting toward their RMD for that year. It’s that simple.
The Columbus Foundation has worked with advisors and their clients to create a new Designated Fund for each of their favorite nonprofits with a QCD each year. Others roll their QCD into an established Designated Fund year after year.
Who should consider using a QCD to establish a qualifying charitable fund?
- Clients who are 70½ or older and are charitably inclined. The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which became law in December 2019, increased the RMD age from 70½ to 72, but IRA owners 70½ or older are still eligible to make QCDs. If your client is over 70½, they should always consider this source of charitable funds before giving cash or writing a check. Before the QCD option was available, the only way to make a lifetime charitable gift using IRA assets was to make a withdrawal, pay the tax, send the proceeds to the nonprofit, and hope that the charitable deduction would offset the income tax due on the withdrawal. Gifts made through QCDs are not eligible for charitable income tax deductions, but they are predictably excluded from income. This straightforward option eliminates any guesswork and is generally more tax-efficient for the client.
- Clients who need to reduce their IRA balance in order to have lower future RMDs. RMDs are calculated based on remaining life expectancy and the IRA account balance. Charitably inclined clients can fund their giving for years to come by using their QCD to establish and grow a qualifying fund, while simultaneously lowering their current tax liabilities and future RMDs.
- Clients who want to support specific organizations. If your client gives annually to their school, house of worship, or other nonprofits, a QCD into a Designated Fund is a great way to streamline and automate that funding stream with annual grants. Fund investment varies depending on whether the fund is designed to provide grants over a limited timeframe or in perpetuity.
- Clients who want to establish or grow a Scholarship Fund. Scholarships can provide life-changing financial aid to students, empowering them to pursue their dreams. But independently managing a scholarship can be a complex and administratively burdensome process. The Columbus Foundation helps manage more than 300 unique, personalized scholarships that are designed in partnership with individuals, corporations, clubs, and professional advisors. New and existing Scholarship Funds are eligible to receive QCDs.
- Clients who want to support the community’s greatest opportunities and needs, but don’t know specifically where to direct their funding. Field of Interest Funds and Unrestricted Funds are great options for clients who want to have an impact in perpetuity and are willing to entrust The Columbus Foundation with identifying needs and opportunities based on parameters set by the donor. Each fund, named by its creator, acts as an enduring, effective, strategic investment in our community—enabling The Columbus Foundation to promote innovation, respond to unforeseen challenges, and invest in the future of our region generation after generation.
For more than 75 years, The Columbus Foundation has served as the vehicle through which thousands of people have expressed their own ideals and optimism through philanthropic investment in our community. Contact us if you are interested in learning more about how The Columbus Foundation can help your clients achieve their desired impact—now, and for generations to come.
About The Columbus Foundation
The Columbus Foundation serves more than 3,000 individuals, families, and businesses that have created unique funds and planned gifts to make a difference in the lives of others through the most effective philanthropy possible. The Columbus Foundation is Your Trusted Philanthropic Advisor® and is one of the top ten largest community foundations in the country.