QCDs: The Tax-Smart Way to Give

How to use Qualified Charitable Distributions to satisfy your RMDs while supporting your favorite causes

As people transition into the later stages of retirement planning, many clients find themselves in a bit of a "tax trap." They have spent decades diligently saving into a Traditional IRA, only to reach their 70s with IRA/401(k) balances exceeding a million dollars and find that the IRS now mandates they take significant amounts of money out each year — whether they need it for living expenses or not. And those mandatory distributions typically grow each year.

These mandatory withdrawals, known as Required Minimum Distributions (RMDs), are categorized as ordinary taxable income and can spike your taxable income, potentially pushing you into a higher tax bracket or increasing your Medicare IRMAA premiums. For example, a 75 year old named "Jack" with a $2 million IRA/401(k) balance would have RMDs of about $81,000, while at 80 years old "Jack's" RMD would be about $99,000.

But what if you could satisfy that IRS RMD requirement, support a cause you love, and keep your taxable income and taxes lower all at the same time? If you are charitably inclined the Qualified Charitable Distribution (QCD) can be a tax game changer. Using this strategy, RMDs and their associated taxes could potentially be a much smaller problem, even for those with reasonably high IRA balances of $1-3 million.

What is a QCD?

A Qualified Charitable Distribution is a direct transfer of funds from your IRA custodian (think Vanguard, Fidelity, Schwab, Merrill Lynch, Morgan Stanley, TIAA, etc.) to an IRS-registered 501(c)(3) charity. The money never touches your bank account. Because it goes directly to the charity, the IRS does not count the distribution as taxable income. However, the amount you give still counts toward satisfying your RMD for the year.

Why Use a QCD? (The "Tax-Smart" Benefits)

Many people assume that donating to charity always results in a tax break. However, since the standard deduction was significantly increased a few years ago, many retirees no longer "itemize" their deductions. For a married couple over 65, their standard deduction in 2026 is $35,500 (not including the temporary $12,000 in bonus senior deductions). This means their $5,000 or $10,000 charitable gifts often provide no federal tax benefit at all. Even a $50,000 gift to charity, if included in itemized deductions, might result in a minimal reduction in taxes because of the relatively high standard deduction.

The QCD changes the game in three ways:

1. Lower Adjusted Gross Income (AGI):  Since a QCD is excluded from your income, it lowers your AGI. This is "above-the-line" tax planning. A lower AGI can help you avoid the "High Income" IRMAA surcharges on Medicare Part B and D and may reduce the percentage of your Social Security benefits that are subject to tax.

2. No Itemization Required:  You receive the tax benefit of the donation even if you take the standard deduction. Note: if you itemize you cannot include QCDs as an itemized deduction — that would be double dipping on tax deductions.

3. The "Efficiency" Factor:  If you take an RMD as a deposit to your bank account, pay taxes on it, and then give the remainder to charity, the charity gets less. With a QCD, the charity gets 100% of the gift, and you pay 0% in taxes.

Who Should Use a QCD?

QCDs probably do not make sense for someone who only gives a couple of hundred dollars to charities in a year. But for those with moderate to high IRA balances who give significant amounts to charity, it can be highly advantageous to give to the charity from a traditional IRA rather than from the person's checking account (or even from appreciated stock).

Typical characteristics that would favor using QCDs:

• Over age 70½

• Have income sources pushing them into the 22% or higher tax brackets

• Regularly give $5,000 or more to charity

• Have IRA (or 401(k)/403(b)) balances over $500,000

Generally, the higher your IRA balances and the greater your gifts to charity the more likely that QCDs will benefit you.

Example: Consider the case of "Jack" cited above who is 75 years old with a $2 million IRA balance. If "Jack" is in the 22% tax bracket and withdraws the $81,000 RMD into his bank account he would owe about $17,800 in additional federal taxes. The RMD may also push him over an IRMAA premium "cliff", resulting in higher premiums on his Medicare Parts B and D. However, if "Jack" gives $50,000 to charity through a QCD and takes the remaining $31,000 as an RMD he will only owe about $6,800 in federal taxes, a savings of about $11,000 in taxes (plus potential additional savings in IRMAA premiums as well as state taxes).

When Can You Use a QCD?

Prior to 2020 the RMD age and the minimum QCD age were both 70½. However, in 2020 the RMD age was increased to 72, then to 73, and in a few years it will increase to 75. Fortunately the QCD age remained the same. This has created an "age gap" in the rules that is important to understand:

• Age 70½: You can start making QCDs as soon as you hit 70½ (even though RMDs are not yet required for many people).

• Age 73 (or 75): Under current law (SECURE Act 2.0), RMDs generally start at age 73. Starting in 2033, for those born in 1960 or later the RMD age increases to 75.

This means you can actually start using QCDs to reduce the size of your IRA before your RMDs even kick in, effectively lowering your future tax liability.

The Limits:  For 2026, the limit is $111,000 per person (indexed for inflation). If you are married, you and your spouse can each give up to that limit from your respective IRAs, for a total of up to $222,000 — half would have to come from each person's own IRA.

The Mechanics: How to Do It

Using a QCD is relatively simple, but the "mechanics" must be handled precisely to ensure proper tax treatment.

1. Verify the Charity:  Ensure the organization is a qualified 501(c)(3) public charity. Note that Private Foundations and Donor-Advised Funds (DAFs) generally do not qualify for QCDs.

2. Direct Transfer is Key:  You cannot deposit the money into your personal checking account and then write a check to the charity. You must instruct your IRA custodian (e.g., Fidelity, Schwab, Vanguard) to issue a check directly to the organization. Depending on your custodian, the check may be mailed to you (but with the charity as the payee). In this case, do NOT deposit the check into your account — just send it on to the charity.

3. Do the QCD Distribution First: The IRS follows a "First Dollars Out" rule which says that the first dollars distributed from an IRA in a year satisfy the RMD for that year. It is best to do the QCD distribution early in the year so that it satisfies your RMD requirement on a tax-free basis. Then you can later choose whether to withdraw any additional amounts from your IRA (or not), depending on how you choose to manage your taxes and what other sources of income you have.

4. Get a Receipt:  Just like any gift, you need a written gift acknowledgment from the charity to keep with your tax records.

5. Reporting on Your Taxes:  Your IRA custodian will send you a Form 1099-R at the end of the year. Interestingly, that form often doesn't distinguish between a regular RMD and a QCD. You (or your tax preparer) must report the total distribution on line 4a of your Form 1040, and then enter the taxable amount (which might be $0) on line 4b, and write "QCD" next to it. For example, if you withdrew $30,000 from your IRA, of which $20,000 was a QCD and $10,000 was a taxable distribution, you would write "$30,000" on line 4a and "$10,000 QCD" on line 4b.

6. Only From an IRA: You cannot do QCDs from 401(k)s or 403(b) accounts, only traditional IRAs (directly funded, rollover, inherited, SEP/SIMPLE). If you want to do QCDs from a 401(k) or 403(b) account you must first roll over those accounts to a traditional IRA and then do the QCD from the IRA.

Is a QCD Right for You?

If you are over 70½, have more money in your IRA than you need for daily expenses, and are already supporting a church, alma mater, or other nonprofit with significant gifts, the QCD is likely the most tax-efficient way for you to give. QCDs can be done in combination with Roth conversions (or instead of Roth conversions) to minimize the tax impact of RMDs. See my blog post on "Roth Conversions - Not the Best Solution for Many Households" to read more about how QCDs can substitute for Roth conversions and reduce your taxes.

At Flourishing Path Financial, we specialize in helping you align your heart for giving with a strategy that protects your hard-earned savings. If you’re ready to see how a QCD fits into your broader financial plan, let’s start a conversation. Contact me or visit www.flourishingpathfinancial.com/book-online to schedule a free Discovery Session.

Author: John Macy, MBA, RICP®

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