Retirement can present unique challenges and opportunities to your financial life. One topic that frequently arises with clients is the desire to continue supporting, or even increasing, support of charitable causes and organizations they’re connected to – perhaps a synagogue, a local youth program, or the nonprofit tied to their alma mater. The question is: how can you give in a way that’s generous and financially efficient?
That’s where the strategy of a Qualified Charitable Distribution (QCD) comes into play: a smart move that benefits your charity and your tax picture – especially the “big three” financial considerations many retirees face: income tax, required minimum distributions (RMDs), and the Medicare Income-Related Monthly Adjustment Amount (IRMAA).
Here’s a dive into what QCDs are, why they’re valuable, how older donors can use them to support worthy causes, and how the numbers stack up compared with other charitable deduction methods.
What is a QCD? And why it matters
A QCD is a distribution made directly from your traditional IRA to a qualified charity. You must be at least 70½ years old when the distribution is made, and it must go directly from the IRA custodian to the charity. The annual limit for 2025 is around $108,000 per individual. A QCD counts toward your RMD and is excluded from taxable income thus reducing your Adjusted Gross Income, tax liability, and potential IRMAA surcharge for Medicare coverage. It’s a win-win strategy for retirees who want to give charitably while managing their tax situation.
Why older donors caring about charities should pay attention
1. You may not need the RMD for living expenses, but if your IRA balance is very high, you may be required to distribute more income (and pay taxes) than your living expenses require. 2. You avoid the standard deduction issue and are still using charity to lower your taxable income. 3. You reduce future RMDs, since they are based on both your age and the available balance in your IRAs. 4. You can better manage your IRMAA risk since a QCD lowers not just taxable income, but also Adjusted Gross Income (AGI) and IRMAA cost increases are based on a modified adjusted gross income and not taxable income.
5. You stay connected to the charities you care about, which can continue to provide qualitative and emotional benefits for retirees.
A practical example: QCD vs Straight Charitable Deduction
Assume “Jane” is age 74 and must take an RMD of $20,000. She also wants to gift $10,000 to a qualified charity. She usually takes the standard deduction and has a 24% tax rate. Scenario A: Straight withdrawal + cash donation – taxable income $20,000, tax ~$4,800. Scenario B: Use QCD for $10,000 of the RMD – taxable income $10,000, tax ~$2,400. Result: Same charitable gift, same RMD satisfied, but lower taxable income and IRMAA risk. In this case, it is because Jane is taking the standard deduction, where charity is not a deductible item. This has been a very common scenario due to relatively recent tax law changes.
Why it matters beyond the numbers
– Keep your relationship to the charity strong. – Timing and documentation matter. – Check that the charity qualifies. – Plan across years to manage IRMAA. – Coordinate with your advisor for optimal tax outcomes.
Common pitfalls & things to watch
– Must transfer funds directly from IRA to charity. – $108,000 (2025) limit applies. In 2026 the limit increases to $115,000. – Cannot double dip with Schedule A deduction. – Ensure the charity receives funds within the same tax year. – Plan QCDs to manage future RMD growth.
Conclusion
If you’re nearing or past RMD age and care about charitable giving, QCDs can align philanthropy with thoughtful retirement tax planning. Talk with your advisor, confirm eligibility, and give purposefully – doing good for the world and well for your finances!
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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA
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