Using Qualified Charitable Distributions (QCDs) to satisfy Required Minimum Distributions (RMDs)

Sep 1, 2023 | Financial Education

Using Qualified Charitable Distributions (QCDs) to satisfy Required Minimum Distributions (RMDs) from your retirement accounts can be a smart financial strategy for several reasons.  Below are 5 reasons to consider utilizing QCDs: 

    1. Tax Efficiency: QCDs allow you to fulfill your RMD obligation while keeping the distributed amount tax-free. When you take a standard RMD and then donate the money to charity, you have to pay income tax on the RMD amount and then claim a charitable deduction, which might not fully offset the tax liability. With a QCD, the distribution goes directly to the charity, and it doesn’t count as taxable income.
    2. Lower Adjusted Gross Income (AGI): By using QCDs, the distributed amount is excluded from your AGI. This can have a positive impact on various aspects of your financial situation, such as reducing the amount of your Social Security income subject to taxation, potentially keeping you in a lower tax bracket, and helping you qualify for certain tax credits and deductions.
    3. Preservation of Tax-Advantaged Savings: QCDs allow you to satisfy your RMD requirement without liquidating assets in your retirement accounts. This can help preserve your tax-advantaged savings and allow your investments to potentially continue growing tax-free or tax-deferred.
  • Generosity without Itemizing: Many taxpayers choose the standard deduction instead of itemizing their deductions on their tax returns. QCDs provide a way to make charitable contributions while still receiving a tax benefit, even if you don’t itemize your deductions.
  • Simplified Record-Keeping: When you make a QCD, the financial institution that manages your retirement account typically handles the paperwork and reporting to the IRS. This simplifies your tax preparation process and reduces the risk of errors in documenting your charitable contributions.

It’s important to note that QCDs have specific rules and limitations. For example, you must be at least 70½ years old to make a QCD, and the annual QCD amount is limited to $100,000 per taxpayer. Additionally, the distribution must go directly from the retirement account to the charity, and certain types of retirement accounts, like Roth IRAs, are not eligible for QCDs.

Before utilizing QCDs, it’s advisable to consult with a tax professional or financial advisor to ensure that it aligns with your overall financial and charitable giving strategy and to ensure compliance with IRS rules and regulations.

Executing the Charitable Contribution

Our best-in-class operations team handles this for many of our clients.  

  • We can issue checks that are tied to your IRA – you just want to make sure they are cashed by the end of the calendar year!

We can wire the contribution to the charity of your choice. 

In addition to these general guidelines, you may also want to consider reviewing your beneficiaries with the help of a financial advisor or estate planning attorney, who can provide guidance on how to ensure that your retirement assets are distributed according to your wishes.

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