QCDs in light of the CARES Act

The U.S. Congress recently passed the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) to provide Americans relief during the COVID-19 pandemic. The act included several provisions that will impact charitable donations in 2020, and one change in particular has sparked many questions among nonprofit organizations.

For 2020 only, the Required Minimum Distribution (RMD) has been waived. This means that anyone with a traditional IRA does not have to remove funds from their IRA this year. RMDs are typically one of the best ways to incentivize donors to give Qualified Charitable Distributions (QCDs) from IRAs to charitable organizations.

This shift comes at a time when QCDs are on the rise. In our 2020 QCD report, we found that the number of QCDs received by a nonprofit in 2019 was 2.9 times higher than the number received in 2017, following two years of strong growth. In addition, more than half of nonprofits reported that the size of the QCD gifts had increased.

We believe that QCDs will maintain 2019 levels (we had previously forecasted a 50% increase over 2019) and are still one of the most impactful ways to fund your organization. Savvy nonprofits will continue incorporating or begin a QCD strategy in their 2020 fundraising efforts.

IRA funds are always pre-tax funds

Funds held in a donor’s IRA are pre-tax dollars and are subject to regular income taxes as soon as they are removed from the IRA. If an IRA holder is eligible to make a QCD (meaning they were 70 ½ or older before January 1), this is still the one of most tax-beneficial ways for them to donate:

QCDs are always tax-free gifts, regardless of whether or not the donor chooses to itemize charitable deductions on their tax return.
The average QCD size on FreeWill is approximately $4,200. This is a far greater deduction than the additional $300 that will be allowed above the standard deduction from the CARES Act provision.
Donors can give up to $100,000 from their IRAs tax-free each year.

Many donors give QCDs annually

Once a donor makes their first QCD, they are likely to make another. In 2019, 91% of QCD gifts were made by previous QCD donors. And since these gifts are highly tax-advantageous, the average size of a QCD is dramatically higher than the average size of an annual cash gift. Converting a cash donor to a QCD donor not only guarantees the person continues to donate, but they continue to donate a higher amount annually.

Persistent giving from IRAs can also open up conversations with your donors around beneficiary designations. Directly giving from an IRA to a nonprofit benefits the donor’s heirs, who will not have to pay estate taxes on the IRA funds, and the organization, who will receive a greater, more powerful gift.

We should also note that the IRAs of many older donors will be performing much better than the stock market overall, as older individuals tend to be more invested in bonds compared to stocks and other more volatile equities.

The “generosity effect”

Research shows that asking for gifts out of stocks, IRAs, retirement accounts, and other “wealth” assets is significantly more effective than asking for cash donations. This is due to the fact that donors make “relative comparisons” when they are considering how much to give. For example, a donor may see $100 cash as “10% of my discretionary budget for the month,” whereas the same donor will see $500 in an IRA as “only 1% of my total account.” (See slides 8 through 14 in this presentation by Dr. Russell James for more information.)

We call this the “generosity effect:” people who believe they have extra wealth are more likely to give larger gifts from their wealth instead of giving cash on hand. This year in particular, our nonprofit partners will be talking to their donors about QCDs, stocks, and Donor Advised Funds as different ways of supporting their missions.

Recommendations

Smart organizations will continue to aggressively market QCDs in 2020. There are lots of eligible QCD donors out there who are eager to help your organization and mission this year, and appreciate the tax benefits associated with making this type of gift.

It is also crucial to educate gift officers on the implications of the CARES Act and QCDs. During COVID-19, donors are hungry for socialization and would love to talk on the phone about your mission, or even just how their day is going. Gift officers making these phone calls should be properly equipped to share their knowledge with donors and encourage them to give a QCD this year. (And explaining the CARES Act provides a great excuse for another conversation!)

Finally, track your gifts. QCDs aren’t just a way to secure funds this year. They’re a way to build a substantial relationship with your donors. Surviving 2020 might be on the top of your mind now, but the implications of COVID-19 may last far beyond 2020. Securing QCD donors today can create a network of enthusiastic, committed and compassionate donors in the coming years.