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I’M NOT ONE TO DIVE into the mysteries of the tax code in an effort to avoid paying Uncle Sam. But I’ve lately stumbled onto something that many others are already well-versed in and which has been around since 2006: qualified charitable distributions.
If I make a contribution from my traditional IRA directly to a charity, the withdrawal is excluded from the taxable income reported by my wife and me and, indeed, it counts toward my required minimum distribution. That means the donation is effectively tax-deductible, even though we no longer itemize.
The Tax Cuts and Jobs Act of 2017 eliminated personal exemptions but doubled the standard deduction—at least through 2025. For many seniors like us, the standard deduction is now higher than we can reach by itemizing.
We pay no mortgage interest, and our property and state tax deductions are capped at $10,000. If my out-of-pocket medical costs ever exceed 7.5% of our adjusted gross income—the threshold to deduct them—I probably won’t be around to know it.
So what’s left to deduct? Charitable donations. Problem is, our donations won’t exceed 2023’s standard deduction of $27,700 for a married couple. We donate to St. Jude Children’s Research Hospital, our church, a local food pantry, a volunteer fire department, the Colonial Williamsburg Foundation and a few other charities.
It’s not a lot, but it comes to several thousand dollars a year. Americans are a generous people. We donated $485 billion to charities in 2021, with $327 billion of that coming from individuals, according to the National Philanthropic Trust.
We would give this money away, regardless of the tax code. But my recent discovery allows me to make our donations tax-free. In case you’re wondering, you can’t do this with a 401(k).
There are requirements, but we meet them handily. My contributions won’t exceed the $100,000-a-year limit, I’m certainly over the required age of 70½ and the charities we support are qualified. On top of all that, the whole process is made easy for me.
I just go to my Fidelity Investments online account, pick a charity and specify the amount I want to contribute. Fidelity deducts that amount from my IRA and sends me a check payable to the charity, which I then mail. I can do this multiple times throughout the year.
I’ll have to take around $50,000 in required minimum distributions this year. My charitable contributions count toward this sum. Say I donate $10,000 to different charities. In effect, $40,000 of my required distributions will be taxable. The $10,000 I’ve given to charity will leave my IRA tax-free. Seems like a good deal to me.
I’m 75 now and discovered the QCD thanks to my SMI newsletter at 71. The annuity distributions begin this year. Discovered that they are incompatible with Donor Advised Funds. “Assume” since they are “qualified funds” those distributions satisfy RMD requirements and may be distributed as QCDs. Any recommendations?
QCDs can also be made from inactive SEP or SIMPLE IRAs: Qualified Charitable Distributions (QCDs) | planning your IRA withdrawal | Fidelity
Just a few hours before reading this article, I initiated a QCD from my traditional IRA at Vanguard. I like the QCD option, and had been looking forward for years to reaching the minimum age to qualify, which I did last year.
Here’s an example of how I leverage the value of my QCD: A few days ago I offered one of the organizations I support a QCD contribution to use as a matching gift incentive. They posted the matching gift fundraiser yesterday, and within a few hours the matching goal was met–doubling the impact of my donation.
A QCD is a really great way to provide more meaningful and significant support for smaller organizations. It allows me to function as if I were a small foundation.
Using the QCD–which is limited to traditional IRAs–does not limit one’s ability to make Roth IRA and 401k/403b contributions. The IRS considers each of these to be separate buckets. Don’t have a traditional IRA? If you have a 401k or 403b account, you could do a rollover of some of the funds to a traditional IRA and QCD away.
Another timing issue. Just because the person writes the check and mails it to the qualified charity as part of their RMD for the year, the check must be Cashed during the year for it to be used as an offset to the taxable RMD amount. If checks are written too late in the year and not cashed, there could be an unintended RMD penalty for not taking the full amount of the year’s RMD. We are counseling clients to plan their charitable contributions for the year as early as possible, sending the checks no later than Nov. 1st to ensure they get cashed by 12/31.
Great advice — thanks for weighing in.
QCDs do seem like an attractive option for charitable giving. I see a lot of recommendations for beginning them at first eligibility, that is, at age 70 1/2. But it seems like the advantages are greatest after reaching your RMD age of 73:
You can make a QCD once you have reached age 70 ½, but it might make more sense to wait until you have reached age 73. The SECURE Act increased the RMD age from 72 to 73, and because one of the most attractive advantages of the QCD is reducing your taxable income by offsetting your RMD amount, it might be more beneficial to wait until you have to take RMDs (at age 73).
Five tax-savvy charitable giving strategies | TIAA
Like many parts of the tax code there are traps associated with Qualified Charitable Distributions.
From IRS Pub. 590-B – Beginning in tax years after December 31, 2019, the amount of QCDs that you can exclude from income is reduced by the excess of the aggregate amount of IRA contributions you deducted for the taxable year and any prior year that you were age 70½ or older over the amount of such IRA contributions that were used to reduce the excludable amount of QCDs in all earlier years.
In other words – if you have made any traditional IRA contributions in tax year(s) after reaching age 70 1/2 then those direct IRA distribution to a charity cannot be excluded from your taxable income until those IRA contributions recaptured.
Also, for anyone making a QCD the QCD amount is NOT excluded from the total or taxable amount as reported on your 1099-R form. The QCD amount has to be separately input into the tax software and if done properly you should see the “QCD” letters to the left of the taxable IRA distribution line on your 1040. There is no third party reporting to the IRS of QCD amounts so it is up to the taxpayer to maintain proof.
The charitable acknowledgement for the QCD should include the date of the gift, the name of the IRA custodian, the amount of the gift, that the gift is a qualified charitable distribution under Sec. 408(d)(8)(A), and state that no goods or services were provided in exchange for the gift.
Gee, that takes all the fun out of it.
Thank you! I have been thinking of doing this with part of the RMD from my traditional IRA at Vanguard, but didn’t realize it was this simple.
Nice article, Dick. Making things like the QCD more well known is one of the benefits of HD. I still have a few years before I can put this into play. As you clearly show, the changes from the TCJA reduce the incentives to contribute. Anything that makes it easy and rewarding to contribute to qualified charities is a good thing.
I have been using the QCD for years. I have a checkbook attached to an IRA account at Schwab and just write a check to the charity which saves the step of contacting the custodian and getting a check. Check with your custodian and see if they offer this check writing service-they probably do.
A person can start QCDs at age 70-1/2. RMDs don’t start until age 72 or 73. I plan to start QCDs when I reach 70-1/2. Any money given away as a QCD reduces my IRA balance and therefore reduces subsequent RMDs. I hope to never take an RMD. Start QCDs at 70-1/2. When I reach age 73, make sure my QCDs for each year exceed my RMD. I am in the fortunate position that I don’t need the money in my traditional IRA – for living or for inheritance purposes.
And we younger folks won’t have an RMD until 75 thanks to SECURE 2.0.
My mother has her IRA with Schwab. Schwab gave her a checkbook and blank checks attached to her IRA account. She simply writes a check to a charity and sends it off. I like this process – easy and direct way to make QCDs.
This is indeed a neat feature. If you want to be even more efficient you can just have the custodian pay the recipient directly.
Thanks for sharing this. I had read about using Donor Advised Funds for the same result, but it looks like you have bypassed them and contribute directly to the charity. Am I missing something? Your process seems more efficient and avoids the extra fees.
You also have to be 701/2 to do a QCD. A DAF is an alternative strategy that makes sense for larger, infrequent donations to maximize itemized deductions.
A heads up: As I understand it, a QCD cannot be made to a donor-advised fund. The donation has to go directly to a charity.
That appears correct through 2022. Secure 2.0 has modified the QCD to DAF starting in 2023. An extensive article on Secure 2.0 provisions is Kitces – https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-student-loan-match/
This is what the Kitces article says:
I don’t see any mention of donor-advised funds. Or am I missing something?
You are correct Jonathan. I misread the Kitces article. Secure 2.0 did not change the direct QCD to DAF rules. Your point from the Kitces article, listed above for QCD’s to split interest entities is was I wanted to convey.
The article goes on to say –
As a result, for clients interested in utilizing the one-time ability to make a QCD of up to $50,000 to fund a split-interest entity, the entity of choice will likely be a Charitable Gift Annuity (CGA). Such entities are created and operated by charities, limiting the associated out-of-pocket costs for taxpayers. Notably, though, CGAs funded via QCDs would be subject to the additional requirements that payments begin no less than 1 year after funding, and such payments are established at a fixed rate of 5% or greater.
While in the new law it is unclear why anyone would want this tax complexity.
Direct to charity, yup. It just worked for me. We had the check made payable to the charity, but mailed to us so we can add a note or direct what it’s for, but we could have sent it direct to charity using the Fidelity system.
Thanks much. We use Vanguard, but same process. I like this process better than the Donor Advised Fund process. I have a few years to wait, so it may be something totally different by then if the politicians keep stirring the pot. But good information to know.
Donor Advised Funds are tax efficient for donating appreciated securities. Fidelitycharitable.org has a great demo, that takes the user through every step of the process. In my experience the actual process is excellent, far better than writing checks or donating online. The charity has its money the next day (or the same day) without incurring fees. For tax purposes, the user only needs retain one annual statement. There’s even an option for donating anonymously and for easily viewing the charity’s latest Form 990.
SECURE 2.0 provides even more options for RMD donations:
https://www.forbes.com/sites/alangassman/2022/12/30/new-tax-law-rewards-charitable-ira-retirees-with-a-50000-income-tax-deferral-opportunity/?sh=5b4c4ff86c96
I have used Fidelity Charitable’s donor-advised fund for several years, funding it with donations of taxable mutual fund shares from Vanguard, where our investments are. I have one horror story, however: A few years ago, I checked on one such donation a few weeks after requesting it, having heard nothing. Fidelity said they had not received anything, while Vanguard said they’d said it. Where was our five-figure sum? Who knew? The wrong person’s FC account? In the ether? Thankfully, Vanguard set up a three-way call, and within 24 hours, Fidelity Charitable’s website posted the donation — without explanation.
Good article Dick. One point that is important to note is timing. It may seem obvious but it is important to know that you must do the QCD BEFORE you take your RMD. Once you have taken your RMD for the year you can’t then do a QCD for that year.
Right, it’s part or all of the years RMD
You can do a QCD to a qualified charity after taking your RMD. True, it will be too late to count toward that year’s RMD. But it will still reduce your IRA balance (thus lowering future RMDs) while being excluded from your taxable income, as this article explains.
And if you’re still working and making contributions to your IRA after age 70.5, that complicates doing a QCD, as this article explains.
Adding to 1PF’s excellent points…post 70.5 and pre the year one’s RMD requirement starts, you can do QCD’s without any RMD requirement. That gives one a full charitable deduction and lowers future RMDs. I am lucky enough to have a birthday early in 2021 and with Secure Act 2 my RMD reqmiurment begins in 2024, thus have 3 years where with QCDs I get a full charitable deductions and along with some Roth conversions I choose to do, lower future RMDs.
Last Sunday I asked the church pastor if he ever heard of the QCD. He didn’t. Have I got a deal for you I told him and briefly explained it. He asked me to write a summary to put in the church bulletin. Most churches have an older population. QCDs might help with those sometime annoying fund drives. I wonder if I can use a QCD for the next car raffle. 🤑
Yes, that’s what motivated my investigation. As a deacon in my church, I try to keep members informed of tax laws that might help them. I wanted to make sure there were no items in the recent changes that affect the QCD.
Dick, just this week I clarified QCD rules with a CPA friend. I should have been patient to wait for your excellent summary.
I just made the first transaction and it worked well. The easiest transaction I ever made involving taxes or avoiding them.
That’s good to know and pass along.