As the year comes to a close, retirees have an opportunity to combine their philanthropic goals with smart tax planning. A Qualified Charitable Distribution (QCD) can help retirees reduce their taxable income, meet required minimum distributions (RMDs), and make a meaningful impact on causes they care about. Read on as we discuss how this strategy offers retirees a tax-efficient way to give back while maximizing their financial benefits.

What Is a Qualified Charitable Distribution (QCD)?

A QCD is a direct transfer of funds from an individual’s IRA to a qualified charity. To qualify, the IRA owner must be at least 70½ years old at the time of the distribution. Retirees can contribute up to $100,000 per year via QCDs without the distribution being counted as taxable income.

For those over 73, QCDs can also satisfy part or all of their RMD obligation for the year. This dual benefit makes QCDs an appealing option for tax-savvy retirees.

Reducing Adjusted Gross Income (AGI) with QCDs

One of the standout advantages of a QCD is its ability to reduce your adjusted gross income (AGI). Unlike a standard charitable donation, which requires you to itemize deductions, a QCD directly reduces the taxable portion of your IRA distribution. This can result in:

• Lower Tax Bracket: By reducing AGI, retirees may fall into a lower tax bracket, minimizing overall tax liability.
• Medicare Premium Savings: Lower AGI can also reduce Medicare Part B and Part D premiums, which are income-based.
• Tax Credit Eligibility: A lower AGI might help retirees qualify for certain tax credits or benefits they would otherwise miss out on.

QCDs vs. Traditional Charitable Deductions

While itemized deductions for charitable giving can also reduce taxable income, they may not be as advantageous as a QCD. Here’s why:

• Standard Deduction Limits: Many retirees pass on itemizing in favor of the standard deduction, especially after the 2017 Tax Cuts and Jobs Act nearly doubled it. If you’re not itemizing, charitable deductions don’t provide an additional tax benefit. QCDs, on the other hand, reduce taxable income directly, regardless of whether you itemize.
• AGI Reduction Impact: QCDs reduce AGI, which has a broader impact on overall tax liability and eligibility for other benefits, whereas charitable deductions don’t lower AGI.

Meeting Required Minimum Distributions (RMDs) with QCDs

For retirees aged 73 or older, meeting RMD requirements is a critical financial consideration. Failure to take the RMD can result in hefty penalties—50% of the amount not withdrawn. Fortunately, QCDs count toward satisfying this requirement.

By making a QCD, retirees can:

• Avoid Taxable RMD Income: Because the QCD amount isn’t included in taxable income, it’s a tax-efficient way to meet the RMD requirement.
• Support Favorite Charities: Retirees can fulfill their philanthropic goals while staying compliant with IRS rules.

How to Make a QCD

To execute a QCD, you need to first verify eligibility. You must be at least 70 ½ years old and the recipient organization must qualify as a 501(c)(3) charity. Next, contact your IRA custodian and request a direct payment to the charity. (QCDs made to individuals or non-qualified organizations won’t count.) Finally, be sure to retain records of the transfer and acknowledgment from the charity for tax purposes.