Do Good and Save Taxes in Retirement: QCD, a not so well known tool to help with RMDs tax liability

Making a difference and saving money never felt this good

For many retirees the term Required Minimum Distribution (RMD) may not evoke positive feelings. Simply because the government forces them to take money out of savings,  (tax deferred accounts such as IRAs and 401Ks) their income goes up and therefore they need to pay more in taxes, may be bumped into a higher tax bracket and perhaps lose a portion of “senior” benefits due to an increase of overall income.  

The QCD is a tool that isn’t being utilized enough by retirees making charitable contributions anyway and can be valuable related to the RMD.

What’s the skinny on the QCD?

The Qualified Charitable Distribution, also known as QCD, is a way for those over 70 1/2 years in age to give funds from their IRA to a charity without those funds being taxed. This particular way of donating comes from a law passed by Congress in 2015. Those who are at or above the age restriction (those that need to pay a RMD) can donate up to $100,000 from an IRA account directly to a favorite charity. The beauty here, is that this donation (if done properly- make sure to following the QCD guidelines) can count towards one’s RMD.  If you're interested in making this type of charitable contribution without being subject to taxes on those funds, be sure to speak with your tax professional before venturing into this potentially beneficial tool.  

RMDs Cause Much Stress

Because the risk of making a mistake can cost one a whopping 50% penalty, Required Minimum Distributions tend to cause individuals above the age of 70 stress. Each institution has their own process and protocols when trying to removing funds from an IRA, individual retirement account, which adds yet another obstacle to this already cumbersome obligation. Also, these funds are almost always subject to taxes when removed. The tax liability can be quite significant as well, depending on the circumstances. Money removed from your IRA is added to your adjusted gross income which may impact one’s tax bracket and at the same time cause a reduction in government benefits.

Three major  benefits of a QCD:

  1. The funds are donated to a charity,

  2. The money taken out of the IRA doesn’t count toward one’s person income

  3. The funds taken out using a QCD will count toward the individual’s RMD balance

BEWARE- Even when you use the money from your IRA as a charitable donation, you can be taxed on it if you don't follow the right steps during the removal from your IRA account. Also, since these funds are not part of your income, you may not claim these donations as deductions.

What charities qualify?

It's important to know that you must choose a qualified charitable organization for your QCD to ensure that it won't be taxed as income. These organizations are charities that are run specifically for religious, charitable, scientific, educational, or literary purposes. Most organizations that are created to prevent cruelty to children and animals, as well as those designed for amateur sports are also eligible. If a charity is considered tax exempt by the US Treasury, it should be eligible for a Qualified Charitable Distribution donation.

Benefits of Using a QCD

Taking money out of your IRA for a QCD won't have any effect on your adjusted gross income, or AGI. Many other factors like Medicare premium costs, itemized deduction phase-outs, the net investment income Medicare surtax, and others can negatively impact your finances due to taxation. With the QCD, you have the peace of mind knowing that you can donate what you wish from your IRA, up to $100,000, without the tax penalties.


This type of donation is ideal for those who don't normally itemize deductions. You can have the benefit of giving to a charity that you admire, without having to consider your direct IRA contribution to your chosen organization when calculating your taxable income. Taking the standard deduction is also made much simpler by using this type of donation.

Using a QCD provides a huge benefit for those seniors who are in a higher tax bracket. It's also ideal for those who are still working, drawing a pension, or have other sources of income that may make your adjusted gross income higher for the year.

By using a QCD, you are able to satisfy either all or part of your RMD, or required minimum distribution. The amount you donate directly from your IRA through the use of a QCD can count as an IRA distribution, a benefit you don't get from other types of charitable donations. Most charitable donations are only tax exempt if the amount is less than 50% of your adjusted gross income. This law is applicable to direct donations from your IRA via the Qualified Charitable Distribution law.

Who should consider a Qualified Charitable Donation?

This type of giving is more beneficial to some groups that others. A QCD works especially well for individuals who have IRA contributions that would put them into a higher federal capital gains bracket. If you find yourself giving to charities frequently but are subject to tax penalties for being in the 15% federal gains bracket, a QCD may be the ideal option that still allows you to give to your desired charity without negative tax consequences. These types of donations can benefit those who have most of their funds in traditional IRAs and retirees who have enough excess income to afford frequent charitable donations. Qualified Charitable Donations were designed to benefit those who don't itemize.

How to complete a Qualified Charitable Distribution from your IRA

When you choose to complete a direct donation from your IRA using the Qualified Charitable Distribution law, there are several important steps to follow so that you feel confident your donation won't be considered as taxable income. The following information can provide some guidance (but doesn’t replace the need to seek professional tax advice in this matter) to help you understand what may be expected to properly complete your tax-free IRA distribution to charity.

– The most important regulation is the age of the person whose IRA account is being withdrawn from. The person whose name is on the account must be 70 1/2 years or older.

– The IRA account needs to be a traditional IRA. Charitable funds from retirement accounts sponsored by employers, like Simple IRA or SEP IRA, are not eligible for QCD. If you have funds in those types of accounts and wish to use the QCD option, you can do an IRA rollover to a traditional IRA. For questions about that process, seek help from a financial professional.

– The charity must be a qualified charity. This means that it has an IRS distinction as a charitable organization. All 501(c)(3) charities should be eligible for the QCD. If you have questions about the status of a charity, you can check the IRS website to see if a specific charity qualifies.

– A confirmation letter from the charity is required to show the funds were donated. This is a standard letter that most charities are likely familiar with providing to donors. The letter must state that no goods or services were exchanged for the monetary donation.

It's important to note that for some individuals there are other ways to give donations that may more financially beneficial than the QCD. If you have questions about which would work best for your individual financial situation, it's helpful to speak with a qualified tax representative or your financial adviser.

Additional Pointers:

  • Although it seems intimidating, the process to claim your QCD on your taxes is not  complicated.

  • When filling out your forms, you list the amount on your Form 1040 tax return in the space designated for IRA contributions.

  • You can put zero as the taxable amount and list the QCD as your charitable donation.

Any questions or concerns with the process should be directed to your tax professional. Using the QCD option means that you have more options to make a difference by supporting charities (thereby making the world a better place)  while saving money on taxes.