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Qualified Distributions to Charity

You may have heard of using your Required Minimum Distribution (RMD) for charitable donations and wondered, what is the benefit?  Wouldn’t it be the same to just take my RMD and make my charitable donations separately?  You might be surprised by the answer. This article will explain Qualified Distributions to Charity (QCD) and the unique planning opportunities they offer.

What is an RMD?

Eventually, the IRS requires you to take money from your tax-deferred accounts, such as your IRAs and 401ks. This is called a Required Minimum Distribution or RMD. RMD distributions come from pre-tax accounts and are taxed as ordinary income. To learn more about RMDs, see my article titled  ‘Back to the Basics:  Required Minimum Distributions’.

What is a QCDs?

A Qualified Distribution to Charity (QCD) is the process of sending a donation directly to charity from your IRA.   Rather than sending a check out to you, your IRA custodian sends the funds directly to the charity of your choice. QCDs are only eligible from IRAs, and cannot be taken from 401ks and 403bs, even though those accounts factor into your annual RMD amount. You can start using QCD at age 70.5, even before your RMDs begin.

How Would QCD Benefit Me?

QCD funds count toward your annual required minimum distribution (RMD) but are not taxable to you.  By sending charitable donations directly, you reduce the taxable income you would pay on those required distributions. When you use QCD, you cannot take a deduction for the charitable gift because you are already receiving a tax benefit by reducing your taxable income. This works great for those who can no longer itemize, as they still get a tax benefit from their giving. What if you still itemize?  There can still be a benefit to QCD over an itemized deduction for your donations. Medicare premiums are based on your taxable income, so reducing the amount of your taxable income can help with the amount you pay in Medicare premiums.

How Does this Work?

Let’s say John (73) has a $750,000 IRA. His 2024 RMD is $28,301.89. John is married to Jane (73).  Jane has an IRA balance of $500,000.  Her RMD is $18,867.92. Together they must take a taxable distribution of $47,169.81 in 2024.

They receive direct income of $5,500 per month ($66,000 per year) which places them in the 12% tax bracket. With the addition of $47,169.81 of income, they will be pushed into the 22% tax bracket. John and Jane are charitably inclined and support a number of charities, including their church, local Food Bank, and several other charities that fight causes important to them. In a typical year, they give $20,000 to these charities.

If the couple takes their RMDs and then later gives $20,000 to charity, they will pay the full tax on their income of $113,169.81, $15,512.36 this year. If the couple gives $20,000 to charity directly from their IRAs, their taxable income will be reduced to $93,169.81, with a tax bill of $10,740.38.  The couple has saved over $4,700 in taxes and still contributed the same amount to charity.

Are there limits?

You might wonder, do I have to give my entire RMD to charity to use QCD? The answer is no, you don’t.  You can give part of your distribution to charity and still have the remaining amount sent to you. The amount you send directly to charity reduces your taxable income and the amount you take will be part of your taxable income for the year.

There is also a maximum amount of allowable QCD. For 2024, the annual limit is $105,000 per person (indexed for inflation) that can be transferred through QCD.

Who can I give it to?

QCDs can be sent to charitable and non-profit organizations as defined by the IRS in Publication 526.  This typically includes things such as churches, colleges, and charitable organizations. QCDs and charitable itemized deductions follow the same eligibility guidelines. They have to be true donations, not a purchase of goods or service.

All in all, QCDs are a great tool to make your charitable giving more tax efficient. By reducing your taxable income, you can give to charities you already support with pre-tax funds, keeping your taxable income lower. At Pathfinder Wealth Consulting, we are here to help you with strategies like this to make the most of the hard-earned money you saved. Reach out to our team of CERTIFIED FINANCIAL PLANNER ™ professionals with any questions you may have.  To learn more about how you can utilize QCDs in your plan, visit our website; or give us a call at 919.463.0018. We are here to guide you forward.


*Case studies are for illustrative purposes and should not be construed as a recommendation. It may not be representative of your experience.

Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.