Maximizing Charitable Giving: Exploring Qualified Charitable Distributions

Qualified Charitable Distributions (QCD) are distributions made directly from an Individual Retirement Account (IRA) to an eligible charitable organization.  Taxpayers may consider using QCDs to increase charitable giving or drive tax efficiencies like reducing their Adjusted Gross Income (AGI) by donating pre-tax dollars from an IRA or satisfying part of a Required Minimum Distribution (RMD).

I. How do QCDs work?

QCDs are a tax-efficient way for individuals aged 70½ or older to donate funds directly from their IRA to eligible charitable organizations.   IRA accounts (traditional IRAs, SEP IRAs, and SIMPLE IRAs) have a required minimum distribution (RMD) for investors when they reach a certain age.  For new retirees, those RMDs begin the year they turn 73 (beginning in 2023) and rise to 75 beginning in 2033.  RMDs are calculated based on the retirement account balance at the end of the prior year and the life expectancy factor of the retiree published by the IRS.   Prior to having to take RMDs, investors may start making QCDs beginning at age 70 ½.  QCDs are not tax deductible per se but serve to reduce the taxable portion of any IRA distributions, including RMDs. 

There are a few other considerations to think about before deciding to make a QCD.  First, QCDs can only be made from an IRA.  Employer-sponsored retirement accounts, including 401(k), 403(b), and active SEP and SIMPLE accounts, are not eligible to make QCDs.  Individuals eligible for a QCD have an annual limit of $100,000 (indexed for inflation starting in 2024).  Any QCDs processed must be directly transferred to a qualified charitable organization that meets the IRS criteria.  Investors who wish to donate to a charitable organization that does not qualify cannot use a QCD for that purpose.  Finally, QCDs cannot be used to make distributions to fund either donor-advised funds or private foundations.

II. What are the benefits of QCDs?

Before considering making a QCD, there are some considerations retirees may want to consider, including their tax situation as well as their ongoing charitable giving intentions. 

As stated previously, QCDs serve to reduce taxable income.  This can be advantageous to those taxpayers who are otherwise unable to itemize deductions on their taxes and benefit more by using an exclusion from income.  Rather than deducting the QCD as part of charitable deductions within itemized deductions, a QCD reduces the portion of the IRA distribution from adjusted gross income (AGI), therefore reducing taxes.  Reducing AGI can also assist in lowering Medicare premiums or increasing the taxpayer’s eligibility for other deductions tied to AGI.   

Charitable organizations rely on donations to continue their cause.  The use of QCDs can serve to generate greater contributions, allowing individuals to support causes they are passionate about while also providing financial support to charities.  Charitable deductions are limited by the amount of AGI.  QCDs are not subject to this limitation, allowing taxpayers to give more generously to their favorite charities.   Retirees wishing to support charitable causes should research and choose a qualified charitable organization based on what’s important to them, including the mission of the organization, financial transparency, and overall impact of the organization.  For many taxpayers, the use of QCDs can allow an ability to do long-term giving to provide a lasting legacy.

Conclusion

Retirees eligible for QCDs who are interested in supporting charitable causes should assess their financial goals, tax situation, and charitable intentions before initiating a QCD.  It can be a tax-smart way to donate – by satisfying part of a Required Minimum Distribution and reducing taxable income.  If you are interested in using a QCD, please contact your financial advisor and/or tax preparation expert to assist you in verifying organization eligibility, understanding the process to initiate, and tax reporting processes.