QCDs allow individuals who are 70 ½ or older to donate up to $108,000 (2025) from their IRAs to qualified charities without having to count the distributions as taxable income. The donation must be made directly from the IRA to the charity in order for the distribution to be considered tax-free. In addition to the tax-free treatment of the distributions, one of the biggest benefits of the QCD is that it can be used to satisfy a client’s required minimum distribution (RMD). This may be music to clients’ ears who have unwanted RMDs - - a way to satisfy them in a tax-efficient manner.
But what about clients who need their RMDs to cover their living expenses? Since 77% of people 65 and older give to charity1, those living expenses likely include a donation to a qualified charity (i.e. church tithing). There are several benefits in utilizing the QCD rather than taking a normal distribution and having it added to the client’s adjusted gross income (AGI). But remember: even if a client has enough deductions to itemize, a charitable deduction occurs “below the line” after the AGI has been calculated.
Besides satisfying a member’s RMD, a QCD may provide these additional benefits as well:
- Clients taking RMDs who are paying taxes on Social Security benefits are impacted because RMDs are added to AGI that is used to calculate the taxation of their Social Security benefits. A QCD, however, is not included in taxable income, which may help lower or eliminate the taxation of benefits.
- Clients taking RMDs who don’t itemize their tax deductions don’t receive tax benefits for their charitable contributions. But a QCD allows these non-itemizers to turn their non-deductible contributions to tax-free contributions.
- Clients taking RMDs who’ve reached their charitable giving limit can also benefit. Itemizers cannot deduct more than 60% of their AGI for charitable contributions, which limits the tax benefit of larger donations. QCDs offer greater flexibility by allowing tax-free distributions up to $108,000 for each IRA owner. Note: because of the tax-free benefit of the contributions, a taxpayer cannot double dip and claim a tax deduction for the donation as well.
When weighing the options of leaving a client’s money at an employer plan versus rolling it to an IRA, it is important to note that the QCD option is only available with IRAs and not with employer plans.