If you have enough retirement savings to enjoy the lifestyle you want, consider donating some of it. It could be a good tax move for you, as well as help your favorite charity.
Many older Americans are focused on conserving their assets to ensure they have enough to spend their golden years the way they planned.
Sometimes, however, it could be a smart tax move to give some of your money away, especially if it’s in a tax-deferred retirement plan that’s subject to required minimum distributions, or RMDs.
When you turn 73, the Internal Revenue Service requires you to take a specified portion of your savings. The reason? Uncle Sam has been waiting decades in many situations, to get his cut of these tax-deferred earnings.
But you can meet up to $108,000 of your RMD amount and not owe tax on it by directly transferring the mandated withdrawal amount, generally from a traditional IRA, to an IRS-approved charity as a Qualified Charitable Distribution, or QCD.
Even better, the QCD option is available before you hit your RMD age. This gives you added time to work on reducing the tax implications of the money you must withdraw.
Quick RMD refresher: RMDs must be withdrawn from certain tax-advantaged retirement plans. These including —
- Traditional IRAs
- Simplified Employee Pension (SEP) IRAs
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs
- 401(k), 403(b), and 457(b) workplace retirement plans
- Profit-sharing plans
- Other defined contribution plans
You must take your first RMD by Dec. 31 of the year in which, under current law, you turn 73. Your initial RMD, however, can be delayed until April 1 of the following year, but you’ll have to take two distributions that year. Individuals born in 1960 or later will face their first RMDs when they turn 75.
RMDs are taxes as ordinary income. This means the tax rates and brackets you use when you figure tax on regular income, such as wages, apply. This is an unwelcome surprise to many who think that since their retirement money was in an investment account, the distributions are taxed at the usually lower capital gains tax rates. Sorry.
If you’re thinking of ignoring the RMD rule, don’t. First, your retirement account fiduciary will bug you to take the proper amount. Also, you could face a penalty of up to 25 percent tax on the amount you were required, but didn’t, withdraw.
RMDs could pose tax problems for septuagenarians who saved a lot in tax-deferred accounts. Based on the amount, which are determined by IRS life expectancy tables, an RMD could create a surprise tax burden. It also could push the older recipient into a higher tax bracket.
QCD tax relief: QCDs can help ease these potential tax implications.
When you give your RMD as a QCD — again up to $108,000 in 2025; the amount is adjusted annually for inflation and will be $111,000 in 2026 — you satisfy the withdrawal requirement, but don’t owe tax on the directly donated amount.
There are, of course, some rules to make sure the strategy works for you and the IRS.
The QCD must come from a traditional IRA, including traditional rollover, inherited, and inactive SEP and SIMPLE IRAs. If you have one of the workplace plans listed earlier that also face RMDs, to take advantage of a QCD you first must roll over your 401(k) et al funds into a traditional IRA. Once the money is in the traditional IRA, then you can then make the QCD.
You can only donate up to the maximum QCD amount to a qualified charity. This is a qualified 501(c)(3) charitable organization. The QCD cannot go to donor advised funds (DAFs), private foundations, or supporting organizations.
Your IRA custodian must arrange for the transfer of the IRA funds to the nonprofit.
You can make a QCD in the year in which your turn 70½. This gives you two-and-a-half years (or more, if you don’t face mandatory withdrawals until age 75) to whittle down your RMD-affected savings. You cannot claim the donated amount as a charitable deduction your taxes.
QCD benefit for standard deduction filers: The loss of the charitable tax deduction is not a problem for many older taxpayers. Aside from possibly large medical claims, they tend to have fewer expenses that can be counted on Schedule A.
So, a QCD offers a tax-saving strategy while also allowing the septuagenarian donor the satisfaction of supporting a favorite cause.
Note, however, that while a QCD is pretty straightforward, you must ensure you meet all the tax rules. And when you’re dealing with the convergence of retirement, philanthropy, and taxes, things can quickly get complicated. Your best move is to consult a tax advisor and/or financial professional to understand the specific tax implications and benefits for your personal situation of making a QCD.
