By Oscar Casas, CFP®, CRPC®, MPAS®, ABFP℠
For many retirees, charitable giving is an important part of their legacy. Whether you support your place of worship, a local nonprofit, or a cause that has impacted your family, you want your gifts to make a genuine difference.
If charitable giving is already part of your financial plan, it’s a good idea to consider how to do so in the most tax-efficient way possible. After all, every dollar that goes toward unnecessary taxes is a dollar that can’t be used to support the organizations and causes you care about.
One strategy we suggest exploring involves using your required minimum distributions (RMDs) for charitable giving. Rather than receiving your RMD personally and then writing a check to charity, you may be able to send those funds directly to a qualified organization through a qualified charitable distribution (QCD). In certain situations, this approach can provide valuable tax benefits while supporting the causes that matter to you.
Benefits of Making a Qualified Charitable Distribution
While cutting out yourself as a middleman saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first.
When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.
To illustrate the potential tax savings and charitable impact of a QCD, consider the following example:
Mark and Linda, both 72, want to support a local food bank. Mark has a $20,000 RMD from his IRA this year, and the couple’s annual taxable income is $120,000.
If Mark takes the RMD and then donates it, the $20,000 can be added to their taxable income, costing them $4,800 in federal taxes (at a 24% tax rate). However, if Mark makes a qualified charitable distribution directly from his IRA to the food bank, the donation is not counted as taxable income, saving them $4,800 in taxes.
With a QCD, the food bank receives the full $20,000, Mark satisfies his RMD, and they avoid extra taxes. This strategy helps reduce taxes while maximizing their charitable impact.
Are You Eligible to Make a Qualified Charitable Distribution?
Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made.
In addition to having the right kind of account, these other requirements must be met:
- You must be age 70½ or older.
- To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
- QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
- Total QCDs cannot exceed the limit of $111,000 as of 2026 (this amount is indexed for inflation) per calendar year per taxpayer, regardless of the number of charities donated to.
- Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.
Is Your Charity Eligible to Receive a Qualified Charitable Distribution?
After establishing your own eligibility, you need to verify that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.
On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are:
- Private foundations
- Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
- Donor-advised funds managed by public charities on behalf of individuals, families, or organizations
How Are Qualified Charitable Distributions Reported?
Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding.
It’s important to understand that Form 1099-R doesn’t distinguish QCDs as a unique distribution type. As a result, your tax preparer may not know you made a QCD unless you let them know. Be sure to inform your tax professional about any QCDs you made during the year so they can be accurately reported on your tax return and you can receive the full tax benefit.
Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified.
Making the Most of RMDs and Charity Donations
If you want your financial plan to prioritize charitable giving, we recommend exploring whether RMDs and charity donations can work together more efficiently. Qualified charitable distributions allow eligible retirees to support causes they care about while potentially reducing taxable income.
Because specific rules and eligibility requirements apply, it’s important to coordinate your strategy carefully. At Tranquility Path Investment Advisors, we help our clients evaluate opportunities to make their charitable giving and retirement income plans work together.
If you’d like to learn more about using RMDs and charity donations as part of your overall financial strategy, contact us today. Schedule a no-obligation conversation or reach us at (908) 759-6322.
