If you’re over the age of 70½ and looking for a tax-efficient way to support your favorite charities, Qualified Charitable Distributions (QCDs) are worth considering. This strategy not only fulfills your philanthropic goals but can also help manage your tax liability. Here’s what you need to know about QCDs and how they work.
What is a QCD?
A Qualified Charitable Distribution (QCD) allows individuals aged 70½ or older to transfer funds directly from their IRA to a qualified charity. By doing so, the distribution is excluded from taxable income, offering significant tax benefits.
QCDs are particularly advantageous for retirees who must take Required Minimum Distributions (RMDs) from their IRAs. A QCD counts toward satisfying the RMD and potentially reduces the taxable portion of your retirement income.
Benefits of QCDs
- Tax Efficiency: Because QCDs are not included in taxable income, they can lower your Adjusted Gross Income (AGI). This could reduce your overall tax liability and help you avoid thresholds that trigger higher Medicare premiums or taxation of Social Security benefits.
- Maximizes Giving Impact: Charities receive the full amount of the donation, untaxed, increasing the value of your contribution.
- Simplified Giving: Even if you don’t itemize deductions on your tax return, a QCD allows you to gain a tax benefit for charitable giving.
Key Considerations for QCDs
To ensure your QCD is successful, keep in mind the following:
- Age Requirement: You must be at least 70½ at the time of the distribution.
- IRA Type: Only distributions from traditional IRAs or inactive SEP and SIMPLE IRAs qualify. Employer-sponsored retirement plans, like 401(k)s, are not eligible.
- Annual Limit: The maximum amount you can transfer via QCDs in 2025 is $108,000 per individual (not per IRA account). Spouses with separate IRAs can each contribute up to this limit though.
- Charitable Organizations: QCDs must be made to a qualified 501(c)(3) charity. Private foundations, donor-advised funds, and supporting organizations are generally excluded. If you are curious as to whether an organization is QCD eligible, you can check on the IRS site by clicking here. Note: it is permissible to make a one-time QCD of $54,000 in 2025 to a split-interest entity. Consult your tax preparer.
- Direct Transfer: The funds must be transferred directly from your IRA custodian to the charity. If you withdraw the funds and then donate them, the amount will count as taxable income.
How to Make a QCD
- Consult Your Financial Advisor: Before initiating a QCD, ensure it aligns with your overall tax and retirement strategy.
- Inform Your IRA Custodian: Notify your custodian of your intention to make a QCD and provide the necessary details about the charity.
- Keep Documentation: Obtain a receipt from the charity and confirm that the transfer meets all IRS requirements. You must have contemporaneous written acknowledgement (CWA) - documentation showing that no benefits were experienced by the giver.
Who Should Consider a QCD?
QCDs are especially beneficial if:
- You are charitably inclined and looking to reduce your taxable income.
- You don’t need your full RMD for living expenses.
- You don’t itemize deductions but still want to maximize the tax benefits of charitable giving.
Pro tip: Make sure you are not still contributing to a traditional IRA. If you are 70½ or older and still making contributions to your traditional IRA, and you also complete a QCD, the QCD could become taxable if a deduction is taken for the contribution.
Final Thoughts
QCDs are a win-win for retirees who want to support their favorite causes while optimizing their tax situation. By planning carefully and staying within the IRS guidelines, you can use this strategy to make a meaningful impact. After all, it is better to give than to receive, as Acts 20:35 tells us!
If you’re considering a QCD, speak with your financial advisor or tax professional to explore how it fits into your financial plan. If you are not currently working with an advisor, please fill out our Discovery Questionnaire to schedule a 30-minute discovery call with our team. We would love to discuss your values and goals in order to determine if we would be a good fit to serve you.
A little planning today can result in big benefits for both you and the charities you care about.
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Disclosures:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Harvest Point® Wealth Management and LPL Financial do not provide specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.