At Cypress Wealth Services, we strongly value giving back to our communities and to those who need our help. And if you are reading this, there’s a good chance you share that same heartbeat for giving to others. Wise financial planning is crucial for you and your family, but a part of successful wealth management is making a difference in those around you.

But you must be wise with your generosity. That’s where we can help—saving you money (especially in taxes) means more opportunities for you to give. The best way to find that extra money is through your required minimum distributions (RMDs). Instead of transferring the money into your bank account, you might consider sending your RMDs straight to a charity, which is called a qualified charitable distribution (QCD). Let’s explore this idea a little further.

Benefits of Making a Qualified Charitable Distribution

While cutting out yourself as a middle man saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first.

When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.

Are You Eligible to Make a Qualified Charitable Distribution?

Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made.

In addition to having the right kind of account, these other requirements must be met:

• You must be age 70½ or older.
• To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
• QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
• Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
• Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.

Is Your Charity Eligible to Receive a Qualified Charitable Distribution?

After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.

On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are:

• Private foundations
• Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
• Donor-advised funds managed by public charities on behalf of individuals, families, or organizations

How Are Qualified Charitable Distributions Reported?

Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding.

Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified.

Work With a Professional

Leaving a legacy is important for your loved ones, but leaving a legacy for your community and for those across the nation or the globe is also incredibly important. If you are dedicated to giving, why not also do it in the most tax-efficient way possible? QCDs are key to wise and charitable giving. The tricky part in wading into the world of QCDs is dealing with all the specific rules and requirements. Luckily, it’s our passion and mission to align your most important priorities (such as your financial needs, family values, and charitable interests) with a plan that is tailored for you. If you are interested in getting started, call us at 866.888.6563 or contact one of our offices today.

About Cypress Wealth Services

Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high-net-worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services serves a broad range of client needs using their knowledge and expertise to act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in California, Alaska, Arizona, and Georgia, the firm serves clients across the country with Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.