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For many retirees, the holidays are the perfect time to give back. An IRS-approved trick can take that generosity even further.
Qualified charitable distributions (QCDs) are direct donations from your IRA that can reduce your tax bill while helping your favorite charities.
“This is one of the IRS’s best-kept secrets from retirees,” Ashton Lawrence, a certified financial planner at Mariner Wealth Advisors in Greenville, South Carolina, told CNBC (1).
So what exactly is QCD and how does it work?
A qualified charitable distribution is a direct transfer from your pre-tax IRA to a qualified charity. Instead of withdrawing the money and then donating it (which would be considered taxable income because it affects your adjusted gross income (AGI)), you send it directly from your IRA and keep it entirely on your tax return.
According to Fidelity, QCDs are best for retirees age 70 1/2 or older who take required minimum distributions (RMDs), don’t itemize deductions, and have IRA balances typically in the six figures or higher. Retirees with smaller IRAs can still benefit, but the tax impact may be less significant(2).
According to the IRS, retirees age 70.5 or older can donate up to $108,000 this way by 2025(3). Married couples can each waive this limit if both spouses qualify. Thanks to the SECURE Act 2.0, the cap will now adjust annually for inflation.
According to the IRS, most Americans (91% of filers) take the standard deduction rather than itemizing(4). While some people choose not to itemize because it can legitimately result in larger deductions, others choose this route because it’s often easier. This means that their regular charitable giving does not actually reduce their taxable income.
QCD is different.
There is no deduction because the money is simply taken out of income, which is “better than a deduction” (1), says Juan Ros, financial managing partner and CFP at Financial Management Forum in Thousand Oaks, California.
If you are age 73 or older, you must begin taking required minimum distributions (RMDs) from your pre-tax retirement accounts, regardless of whether you need the cash. Skip it and the IRS will fine you.
A QCD allows you to donate part or all of your RMD directly to charity, thereby satisfying the requirements while avoiding a tax hit.
“For my philanthropic clients, this is almost a given,” adds Jim Guarino, CFP and managing director of Baker Newman Noyes in Woburn, Massachusetts(1).
While a QCD can help you reduce your taxes and reduce your RMDs, figuring out the exact amount can be challenging. But a financial advisor can help you figure it out.
You can find an experienced financial advisor near you for free with Advisor.com. Their network is made up of trustees who are legally obliged to act in your best interests, so you can trust that the advice you receive is impartial.
Additionally, advisors on the platform undergo a rigorous vetting process based on track record, assets under management (AUM), client ratios and regulatory background.
Here’s how to get started: Just enter some basic information about your financial situation and goals, and Advisor.com’s AI-powered advisor matching technology will match you with the best-fit advisor.
For families looking for more personalized help, the Advisor Wealth Management (AWM) platform combines AI-driven tools with hands-on support from experts to keep your plan on track.
But choosing an advisor still depends on personal relationships. That’s why Advisor.com lets you set up a free initial consultation without hiring one to see if they’re right for you.
To set up a QCD, you need an IRA, but what if your retirement funds are still in a 401(k) or other plan?
You must roll it into a traditional IRA. Most 401(k) and employer plans allow transfers to IRAs, which then qualify as QCDs. After funds are deposited into an IRA, you can instruct the custodian to send the donation directly to a qualified 501(c)(3) charity so that the money is not considered taxable income on your part.
Remember, timing is important. IRS rules generally require rollovers to be completed within 60 days to avoid penalties. Donor-advised funds and private foundations are not eligible, so check the charity carefully before transferring.
By rolling your 401(k) or other retirement savings into an IRA first, you can take advantage of the full tax benefits of a QCD, even if you don’t have a qualifying account to begin with.
Key things to remember:
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You must be 70 1/2 years or older when contributions leave your IRA – remember, SEP and SIMPLE IRAs are not eligible. (5)
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Tell your IRA custodian to send the money directly to the charity instead of you.
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Verify that the organization meets 501(c)(3) requirements, as donor-advised funds and private foundations do not count.
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Keep all receipts and records.
Federally, QCDs do not count as income, but tax treatment may vary by state. Some states are fully compliant with IRS regulations, while others are not. Before transferring funds, double-check with your state’s tax office or tax professional.
QCDs can be a win-win for retirees who want to donate generously and reduce their tax bill. With one move, you can meet your RMD, lower your income, and support the causes you care about.
While QCDs are a great way to give back, it’s important to understand how they impact your finances, especially in retirement.
High net worth individuals can use Range to receive proactive advice throughout their financial lives, from investments and taxes to estate planning.
You can get professional advice from experts 24/7 at a fraction of the cost of a traditional Certified Financial Planner (CFP). Range offers 0% AUM fees and a flat fee structure for advisory services so you can retain more of your wealth.
They also offer integrated solutions for everything from alternative asset management to tax – all informed by modern AI solutions but backed by a team of certified financial professionals.
Additionally, you get a custom cash flow analysis – helping you figure out how much of your disposable income you can allocate to qualified charitable distributions without impacting your lifestyle.
The best part? You can book a free demo with a Range expert to see if they can meet your comprehensive financial needs.
Learn more: Warren Buffett turned $9,800 into a $150B fortune using 8 solid, repeatable money rules. Start using them to get rich (and stay rich) today
We rely only on vetted sources and reliable third-party reports. For more information, see our Editorial Ethics and Guidelines.
We rely only on vetted sources and reliable third-party reports. For more information, see our Editorial Ethics and Guidelines.
CNBC(1); Fidelity Charitable(2); Internal Revenue Service(3, 5); Tax Policy Center(4)
This article provides information only and should not be considered advice. It is provided without any warranty of any kind.