This little-known tax move takes the sting out of RMDs. Yet 90% of Americans are missing it. How not to be one of them
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For many retirees, the holiday season is the perfect time to give back. And there’s one IRS-approved trick that can make that generosity go even further.
A qualified charitable distribution, or QCD, is a direct donation from your IRA that can shrink your tax bill while helping your favorite charity.
“It’s one of the IRS’ best-kept secrets for retirees,” Ashton Lawrence, a certified financial planner at Mariner Wealth Advisors in Greenville, South Carolina, told CNBC (1).
So what exactly is a QCD and how does it work?
A qualified charitable distribution is a direct transfer from your pretax IRA to a registered charity. Instead of withdrawing the money and then donating it, which counts as taxable income because it impacts your adjusted gross income (AGI), you transfer it directly and keep the transaction off your tax return entirely.
According to Fidelity, QCDs are best for retirees who are 70½ or older and taking required minimum distributions (RMDs), who don’t itemize deductions and have IRA balances that are typically mid–six figures or higher (retirees with smaller IRAs can still benefit, but the tax impact may be less dramatic) (2).
For this year, retirees aged 70½ or older can donate up to $108,000 this way, according to the IRS (3). Married couples can each donate up to that limit if both spouses qualify. Thanks to the Secure Act 2.0, that cap now adjusts for inflation every year.
The majority of Americans — 91% of filers, according to the Tax Policy Center — take the standard deduction instead of itemizing (4). While some choose not to itemize because it can yield a larger deduction, others simply opt for standard deductions because they can be simpler. That means their regular charitable donations would not actually lower their taxable income.
QCDs are different. There’s no deduction because the money is simply excluded from income, which is “better than a deduction,” said Juan Ros, CFP and partner at Forum Financial Management (1).
If you’re 73 or older, you have to start taking required minimum distributions (RMDs) from your pretax retirement accounts, whether you need the cash or not. If you skip it, the IRS will hit you with a penalty.
A QCD lets you donate part or all of your RMD directly to charity, fulfilling the requirement while avoiding the tax hit.
“For my philanthropic clients, it’s almost a no-brainer,” said Jim Guarino, CFP and managing director at Baker Newman Noyes (1).
That doesn’t necessarily mean it’s a no-brainer for you too, though. That’s why it can be worth working with a qualified financial advisor, who can walk you through the process and help determine whether it’s the best strategy for you — especially if you have a high net worth in retirement.
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Once your net worth enters this ballpark, one of the biggest financial pain points can be asset under management (AUM) fees for your investments. Portfolio managers take a percentage of your managed assets’ value, typically between 0.5% and 2%, of your portfolio — so their fees scale with your wealth.
Range offers 0% AUM fees for advisory services and a flat-fee structure so that you can preserve more of your money. What’s more, they also offer an all-in-one solution for everything from alternative asset management to taxes, informed by modern AI solutions and backed by a team of certified financial professionals.
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To make a QCD, you’ll need funds in an IRA — but what if you’re invested in a 401(k) or another type of vehicle instead?
You’ll have to roll over your investments into a traditional IRA. Most 401(k)s and employer plans allow transfers to IRAs, which then become QCD-eligible. Once the funds are in the IRA, you can instruct the custodian to send the donation directly to a qualified 501(c)(3) charity, which keeps the money out of your taxable income (2).
Keep in mind that timing matters. IRS rules generally require rollovers to be completed within 60 days to avoid penalties. Donor-advised funds and private foundations don’t qualify, so double-check the charity before transferring.
By moving your 401(k) or other retirement savings into an IRA first, you could unlock the full tax benefits of QCDs, even if you didn’t start with an eligible account.
Key things to remember:
You have to be at least 70½ when the donation leaves your IRA — keep in mind SEP and SIMPLE IRAs aren’t eligible (5).
Tell your IRA custodian to send the money directly to the charity and not to you.
Verify the organization is a qualified 501(c)(3), as donor-advised funds and private foundations don’t count.
Keep all your receipts and records.
Federally, QCDs are excluded from income, but tax treatment can vary by state. Some states conform fully to IRS rules, while others don’t. Before you move money, double-check with your state’s Department of Revenue or a tax professional.
For retirees who want to give generously and cut their tax bill, QCDs could be a win-win. With a single move, you can satisfy RMDs, keep your income lower and support causes you care about.
