What Is a Qualified Charitable Distribution?

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How to make the most of the fastest-growing type of philanthropy

What Is a Qualified Charitable Distribution?

Right now, Qualified Charitable Distributions (QCDs) from IRA accounts are the fastest growing area of philanthropy. From 2017 to 2019, nonprofits saw an almost 3X growth in the number of QCD gifts they received from donors.

But if you’re new to this powerful form of giving, you might be wondering what a “QCD” is. A QCD, also known as an IRA charitable rollover, is money that donors can give directly from their IRA accounts to your nonprofit. Anyone over the age of 70.5 can give a pre-tax QCD gift from their traditional IRA. (Roth IRAs are post-tax money, so they don’t have the same advantages.)

Why are QCD gifts on the rise? How have they changed during COVID-19? And how can your nonprofit can tap into these gifts?

LinkedIn QCD Graphic

Why QCD gifts are growing

In 2017, the Tax Cuts and Jobs Act doubled the standard deduction for tax years 2018 through 2025. It also capped itemized tax deductions for state and local taxes and mortgage interest.

So now 90% of taxpayers get a bigger tax break from taking standard deductions than they do from itemizing deductions. This means that the majority of people don't get any tax benefits from cash donations to charities.

10% of Taxpayers

But when donors make a gift out of their IRAs, they actually lower their overall taxable income instead of increasing their deductions. This is a tax break for all donors who give from their IRAs. And it makes QCDs one of the most tax-efficient ways for older donors to give. The more that donors learn about this, the more they take advantage of this giving option.

Demographic changes are also contributing to this increase in QCDs. Baby Boomers (ages 55 to 74) are America’s most affluent generation. They hold more than $9 trillion in their retirement accounts and the majority of Boomers will be QCD-eligible over the next decade. This gives nonprofits an unprecedented opportunity to tap into a powerful form of giving. 

The data on QCDs and nonprofits

At FreeWill, we recently published our 2020 QCD Report. This report provides industry insight and expert recommendations on QCDs, analyzing survey results from hundreds of nonprofits as well as internal data from our QCD tracking tool.

Here are a few of our findings:

  • QCDs are extremely valuable to nonprofits: Over 50% of the nonprofits we surveyed reported that the average size of their QCD gifts increased in 2019. (The average QCD gift was $7,900.) Plus, the larger the nonprofit, the bigger the size of their average gift.

     
  • Some sectors attract more QCDs than others: Higher education and health-related organizations received almost half of all QCDs processed on our platform in 2019 (25% and 23% respectively). These were followed by arts and culture, social good, and civil rights organizations.

     OCD Beneficiaries by Sector
  • Nonprofits have a huge opportunity for IRA beneficiary designations: IRA beneficiary designations are a type of planned gift where donors can name a nonprofit as the recipient of their retirement account after they pass away. In 2019, men gave 67% of all QCD gifts on our platform. However, 80% of women said they wanted to learn more about how to make a nonprofit the beneficiary of their IRA. This is a big opportunity for nonprofits to capture large planned gifts.

The CARES Act and QCDs in 2020

Required Minimum Distributions (RMDs) are a major incentive for older donors to give QCDs. RMDs are the amount that IRA owners have to withdraw from their accounts after they turn 72 (or if they'd already turned 70.5 before January 1, 2020). When a person doesn’t take out this money, they face a large tax penalty. So they can either withdraw the money, which increases their taxable income, or donate it as a QCD.

However, the CARES Act waived RMDs for 2020 as part of the COVID-19 pandemic relief. This change sparked a lot of questions from nonprofits about what it would mean for QCDs this year.

However, despite the changes, QCD gifts are still on the rise. For a recent webinar, we again surveyed nonprofit professionals about QCDs. For those who knew about their organization’s QCD gifts, more than one-third of them reported that gifts had actually increased this year. Almost 60% said that gifts stayed the same, and only 7% said they saw a decrease.

One of the likely reasons for this is that QCD donors are used to making this gift annually. In fact, we found that 91% of QCD gifts in 2019 were made by previous QCD donors. Another reason may be that nonprofits have also stepped up their marketing efforts around QCDs, emphasizing how these gifts can make a big difference to their organization during COVID-19.

Average Gift Size

Three ways nonprofits can get more QCDs

Nonprofits have a huge opportunity to further their fundraising efforts through QCD gifts. And smart organizations are aggressively marketing this form of giving in 2020. In fact, 76% of the nonprofits we surveyed for our QCD report said that they planned to increase these marketing efforts.

Here are three ways your organization can get started:

1. Increase donor education.

Many QCD-eligible donors don’t know about the tax benefits of giving from their IRA accounts. These donors want to support your organization, but need more information. Now is a great time to train your gift officers about the benefits of QCDs and how your donors can make them.

Reach out to your older donors with this information, both by email and through personal phone calls. During COVID-19, your donors may be looking for socialization, making them more likely to pick up the phone and have a conversation.

You can also use this time to re-engage previous QCD donors. Educate them about what the CARES Act means for RMDs and why QCDs are still a great way to give.

2. Lean into the “generosity effect” and social norms.

Asking for donations from wealth assets is significantly more effective than asking for cash donations. This is because donors make relative comparisons when considering how much to give. While a donor may see $100 in cash as 10% of their discretionary budget for the month, they may see $500 from their IRA as only 1% of their total account. This is called the “generosity effect”—people who feel like they have extra wealth are likely to give more from their wealth than they would give from cash.

Pair this effect with social norm examples or donor stories when asking for QCDs. For example, you can say "donors like you gave a gift from their IRA this year.” This kind of language will better equip your nonprofit to significantly increase gifts.  

3. Track your gifts and follow up with donors. 

As mentioned, donors tend to give QCDs annually. If you tracked your gifts in previous years, follow up with those donors. And make sure you track your gifts again this year. IRA custodians don’t always share information with nonprofits, so you will want to create a way for your donors to let you know about these gifts.

When you do learn of QCD donors, you should try to build a relationship with them over time, and remember to ask them for another QCD in the following years.

We recommend emailing your QCD donors several weeks before their “QCD-versary”— the date they made their gift in the previous year. When you secure new QCD donors and engage your previous ones, you set your organization up for fundraising success year after year. 


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