How to Use Qualified Charitable Distributions to Give to Charity

Distributions made from traditional IRAs contribute to taxable income—even if the withdrawal is part of a required minimum distribution (RMD). But a qualified charitable distribution (QCD) can offer multiple benefits if you wish to give charitably.

Not only do these special distributions reduce the amount of taxable income for the year they’re made, but they also provide crucial financial support to your favorite charities and organizations.

Here’s what charity-minded retirees need to know about QCDs.

What Is a Qualified Charitable Distribution?

A QCD is a distribution made from your tax-deferred IRA and paid directly to a qualifying charity or organization. Since the distribution is made to the charity instead of you, the amount is excluded from your taxable income.

For an IRA distribution to qualify, the following criteria must be met:

• You must be at least 70 1/2 years old. Otherwise, the distribution will be counted as taxable income.

• You must make the distribution by December 31 if you’d like the distribution to count toward that year’s RMDs.

• The distribution must be made directly to the charity itself. If the distribution check is made out to you, even if you intend to give the money to charity, it will not count as a QCD.

Which Accounts Can You Make QCDs from?

According to the IRS, you can make a qualified charitable distribution from the following accounts:

• Traditional IRAs

• Inherited IRAs

• Inactive SEP IRAs

• Inactive SIMPLE IRAs

In some cases, it is possible to make a charitable distribution from a Roth IRA. However, Roth IRAs have no required minimum distributions, and withdrawals are already tax-free—meaning there is no notable tax advantage in doing so.

Is There a Maximum for Qualified Charitable Distributions?

Yes, the annual maximum distribution limit for QCDs is $100,000 per taxpayer. If you are married and file your taxes jointly, you and your spouse can each make a $100,000 QCD from your individual IRAs.

While $100,000 is the total annual limit, you can make distributions to as many different qualifying charities as you like. If the sum of your contributions is above $100,000, the amount exceeding the limit will not reduce your taxable income. For example, if you make $120,000 in QCDs, the first $100,000 will reduce your taxable income—but you will still be required to pay taxes on the remaining $20,000.

How Does This Affect Required Minimum Distributions?

You must begin taking required minimum distributions at age 72. RMDs from traditional IRAs increase your taxable income for the year they’re made. If you do not need this income to cover your yearly expenses in retirement, the RMD can create a frustrating additional tax obligation.

You can use qualified charitable distributions to satisfy your RMD requirements, reduce your taxable income, and support your favorite charities. You may contribute all or a portion of your RMDs to charity. If you donate a portion, you still need to withdraw the remaining amount and pay taxes on it.

For example, say your RMDs for 2023 are $20,000. You decide to donate $15,000 to a qualifying charity using a QCD. You are still required to withdraw the remaining $5,000 of your RMDs, and that $5,000 will count toward your 2023 taxable income.

What Charities Are Eligible to Receive QCDs?

For a qualified charitable distribution to count, it must go to a public charity as specified by the IRS.

Ineligible organizations and charities include donor-advised funds and private foundations. In addition, you may not receive any direct benefit from your donation. For example, you cannot use a QCD to cover the cost of attending a charity benefit dinner.

Reducing Your AGI through QCDs

When used thoughtfully, qualified charitable distributions can provide an effective way to contribute generously to charity and reduce your taxable income. If you’d like to incorporate charitable giving into your financial plan, you may find it beneficial to work closely with a trusted financial professional.

Our fiduciary wealth management firm in California and Utah works with clients to understand the importance of timing, tax efficiency, and more when donating during retirement. Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.