Military Spouses and Qualified Charitable Distributions
Sponsored by First Command Financial Services
As military spouses, we often live by “the no-plan-plan.” The pandemic was a HUGE no-plan-plan experience for everyone, including military spouses, service members, businesses, and nonprofits. Nonprofit organizations have been hit tremendously hard as donations and giving have been down during the past two years. As the pandemic raged, charities felt the blow of the lack of giving, which ultimately impacted their ability to support the one they love the most: their communities.
As we slowly climb our way out of the pandemic, we have a prime opportunity to restart the charitable giving that many of us were forced to pause during the pandemic. And get this… Those charitable gifts don’t just reap those “feel-good-warm-and-fuzzy” feelings while benefiting the local community, they can also provide some often-unforeseen financial perks.
For example, if you are an IRA owner at the age of 70½ (or older), you have the option of making a qualified charitable distribution (QCD). In English, a QCD is a direct transfer from a traditional or inherited IRA made payable to a qualified charity.
Also, transfers from inactive Simplified Employee Pension Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRA plans apply. By making a QCD to support a worthy cause, you could have an enormous impact (especially when businesses are starting to emerge again). As a bonus, it may provide a tax benefit to you for the next tax season.
How do Qualified Charitable Distributions operate?
Ready to dig in? Ok, pencils up… For a QCD to work, it must be paid directly from an IRA to your charity of choice. Because of this you cannot receive a distribution directly from your IRA and then donate to said charity. Also, you cannot receive any benefit in return for your charitable donation. Got it? Great!
Another aspect to consider is that your designated charity must be qualified to receive QCDs. Charities such as donor-advised funds, private foundations, and nonprofits that support these types of organizations are all considered ineligible.
Finally, it is important to note that IRA owners can directly transfer up to $100,000 annually ($200,000 for joint tax filers) from an IRA to a charity without any taxation. However, this limit applies to donations made to one or more charities in a calendar year. Furthermore, QCDs cannot be made from an IRA prior to the owner reaching the age of 70.5 years old. (Whew! Thanks for making it through those details with us!)
What steps should I take to seek a Qualified Charitable Distribution?
Seeking a QCD is a straightforward, but there are still regulations to follow:
- Ensure that the funds are transferred directly from your IRA to the qualified charity by December 31 to count for distribution towards your required minimum distribution (RMD) for the year.
- The IRA custodian must issue the check made payable to the public charity. The best approach when mailing to a charity is to request that the check be mailed directly to the charity.
- Track the mail’s arrival so you know when and where it is located.
- You can request that the check be made payable directly to the charitable entity. Then have the check mailed to your personal address, so it can be given to the correct administrative department. This step may prevent misplacement or mailbox thieves.
Once all those steps are completed, follow up with the charity of your choice and request a receipt for documentation of the QCD for your personal files.
What are the tax ramifications of Qualified Charitable Distributions?
Note that a QCD is quite different from a typical IRA withdrawal. Why? So glad you asked. A QCD excludes the withdrawn and donated amount from any taxable income. Your IRA custodian will give you a Form 1099-R, so the QCD should be reported as a Normal Distribution for the calendar year the distribution is made. Then, you must report the QCD on your Form 1040.
Ok, now here’s some extra important info: Be advised that a distribution from your IRA will not qualify as a QCD – and will therefore be treated as taxable income if:
- The distribution check is made payable to you rather than the charity.
- You request a QCD prior to reaching age 70.5 years old.
In short—make sure you don’t do the two items listed above, or you will not be able to reap the potential benefits of QCD.
Did you get all that? Now it’s time for the quiz… Just kidding. QCD can be beneficial, but also quite confusing, so if it is something you are interested in pursuing (or even just want to learn more), don’t hesitate to contact a First Command Financial Advisor today.
As mentioned, the last two years have taken a toll on so many people financially, but as we emerge from the grips of the pandemic, we may be in the position to bless others. If you can bless a deserving charity, look into your eligibility to make a QCD. Not only does it feel great to help others, but it can be of great benefit to you with potential tax benefits. So regardless of how you choose to give, we encourage generosity to become part of your military spouse “no-plan-plan.”
©2022 First Command Financial Services, Inc. parent of First Command Brokerage Services, Inc (Member SIPC, FINRA), First Command Advisory Services, Inc., First Command Insurance Services, Inc. and First Command Bank. Securities products and brokerage services are provided by First Command Brokerage Services, Inc., a broker-dealer. Financial planning and investment advisory services are provided by First Command Advisory Services, Inc., an investment adviser. Insurance products and services are provided by First Command Insurance Services, Inc. Banking products and services are provided by First Command Bank (Member FDIC, Equal Housing Lender). Securities are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met. First Command Financial Services, Inc. and its related entities are not affiliated with, authorized to sell or represent on behalf of or otherwise endorsed by any federal employee benefits programs referenced, by the U.S. government, or the U.S. armed forces.
