QCD (Qualified Charitable Distribution)

A QCD is one of the most tax-efficient ways to give to charity in retirement. Instead of taking your Required Minimum Distribution (RMD) as taxable income, you send it straight to charity—avoiding income tax entirely.

How QCDs Work:

Traditional Approach (Taxable):

1. Take $20,000 RMD from IRA
2. Pay income tax (~$4,400 at 22% bracket)
3. Donate $20,000 to charity
4. Deduct $20,000 on taxes (if you itemize)
5. Net tax saved: $0 (if you don't itemize, you pay $4,400!)

QCD Approach (Tax-Free):

1. Transfer $20,000 directly from IRA to charity
2. Counts toward RMD
3. $0 taxable income
4. Tax saved: $4,400

QCD Requirements:

Age:

• Must be 70½ or older (not 73 like RMDs)
• Can start QCDs before RMDs kick in

Account Type: ✅ Traditional IRAs ✅ Inherited IRAs ✅ Inactive SEP/SIMPLE IRAs ❌ 401(k)s, 403(b)s (must roll to IRA first) ❌ Roth IRAs (allowed but provides no tax benefit)

Charity Requirements: ✅ Must be 501(c)(3) public charity ✅ Direct transfer from IRA custodian to charity ❌ Donor-advised funds (not eligible) ❌ Private foundations (not eligible) ❌ Supporting organizations (not eligible)

Annual Limits:

• $105,000 per person per year (increased from $100,000 in 2024)
• Married couples: $210,000 combined (each can do $105,000)
• One-time $50,000 to charity gift annuity or charitable remainder trust (new in 2024)

Tax Benefits Beyond Avoiding Income Tax:

1. Doesn't Increase AGI (Adjusted Gross Income): Lower AGI means:

• Lower Medicare Part B/D premiums (IRMAA thresholds)
• Reduced tax on Social Security benefits
• Better eligibility for other tax credits/deductions

Example: Scenario: Retiree with $60,000 income, $25,000 RMD

Without QCD:

• Income: $60,000 + $25,000 RMD = $85,000 AGI
• Donates $10,000 to charity (itemized deduction)
• Taxable income: $75,000 (after $10,000 deduction)

With QCD:

• Income: $60,000
• QCD: $10,000 (not counted in AGI)
• AGI: $60,000
• Taxable income: $60,000

QCD saves income tax AND keeps AGI lower for Medicare premiums

2. Helps Non-Itemizers: With standard deduction at $30,000+ (married), most retirees don't itemize. QCD gives you tax benefit even if you take standard deduction.

3. Reduces Taxable Estate: Lowers IRA balance, reducing estate taxes for large estates.

When QCDs Make Sense:

✅ You're 70½+ and charitably inclined ✅ You take the standard deduction (can't itemize) ✅ You don't need your full RMD for living expenses ✅ You're trying to avoid Medicare IRMAA surcharges ✅ You want to reduce taxes on Social Security benefits

QCD Strategy Examples:

Strategy 1: Eliminate RMD Tax

• RMD: $30,000
• QCD: $30,000 to charity
• Taxable RMD: $0
• Tax saved: ~$6,600 (at 22% bracket)

Strategy 2: Partial QCD

• RMD: $40,000
• Need for expenses: $30,000
• QCD: $10,000 to charity
• Taxable RMD: $30,000
• Tax saved: ~$2,200

Strategy 3: Pre-RMD Giving (Ages 70½-72) Use QCD before RMDs start to reduce IRA balance and future RMDs

Strategy 4: Bunch Charitable Giving Instead of giving $5,000/year to charity from checking, do $5,000 QCD from IRA and keep the checking account money

How to Execute a QCD:

1. Contact IRA Custodian: Request QCD form (not a regular distribution)
2. Provide Charity Info: Charity name, address, EIN, amount
3. Request Check: Made payable to charity (not you!)
4. Get Receipt: Charity must provide written acknowledgment
5. Report on Taxes: Shows on 1099-R, but excluded from taxable income on Form 1040
6. Keep Records: Save all documentation for IRS

Common Mistakes:

❌ Taking distribution yourself, then donating → Not a QCD! Must be direct transfer ❌ Donating to donor-advised fund → Not eligible ❌ Forgetting to get written receipt → IRS requires documentation ❌ Not coordinating with RMD → QCD must happen in same year as RMD it's satisfying ❌ Using Roth IRA → Allowed but provides no benefit (Roth is already tax-free)

The Bottom Line: If you're 70½+, charitably inclined, and taking RMDs, QCDs are almost always superior to taking the RMD as income and then donating the money.