Reducing RMDs With QCDs

December 22, 2023
A qualified charitable distribution (QCD) can be a great way to reduce required minimum distributions (RMDs) and optimize the tax benefits of giving.

For retirees who've accumulated significant savings in their tax-deferred accounts, the onset of required minimum distributions (RMDs) at age 73 can have serious tax consequences. "The higher the balance in your tax-deferred accounts, the higher your RMDs—and potentially your tax bracket," says Hayden Adams, CPA, CFP®, director of tax and wealth management at the Schwab Center for Financial Research.

If charitable giving is part of your financial plan, a qualified charitable distribution (QCD) can further your philanthropic goals and help reduce the tax hit from your RMD.

QCDs allow individuals age 70½ and older to make tax-free donations directly from an IRA to a qualified charity, potentially satisfying all or part of their annual RMDs. Previously QCDs were limited to $100,000 per year; however, under new SECURE 2.0 Act rules, that amount is now indexed for inflation. For 2024, the QCD limit has increased to $105,000. You can also use up to $53,000 of a QCD to make a one-time donation to a Charitable Remainder Trust (CRT) or Charitable Gift Annuity (CGA).

"QCDs don't count as income—meaning you can't deduct the contribution on your tax return—but their tax benefits could outweigh those of donating cash or other assets to charity," Hayden says. For example, let's say you're 75 years old and single, and you need $125,000 in income this year. You're required to withdraw $110,000 for your annual RMD and will receive another $50,000 of taxable income from a pension and Social Security—pushing your total taxable income to $160,000. By making a QCD equal to your excess income ($35,000), you could potentially pay $3,408 less in taxes than if you took the full RMD and donated the cash after the fact.

Cash vs. QCD

Taking your full RMD and then donating cash could result in a higher tax bill than if you were to give through a QCD.

Scenario 1

Take full RMD and donate $35,000 in cash

Nonportfolio income: $50,000

Annual RMD: + $110,000

QCD: $0

Pretax income: = $160,000

Itemized deduction: – $35,000

Taxable income: = $125,000

Estimated taxes due: $23,400

Take full RMD and donate $35,000 in cash

Nonportfolio income: $50,000

Annual RMD: + $110,000

QCD: $0

Pretax income: = $160,000

Itemized deduction: – $35,000

Taxable income: = $125,000

Estimated taxes due: $23,400

Scenario 2

Donate $35,000 of RMD directly to charity using a QCD

Nonportfolio income: $50,000

Annual RMD: + $110,000

QCD: – $35,000

Pretax income: = $125,000

Itemized deduction: – $15,700

Taxable income: = $109,300

Estimated taxes due: $19,632

Donate $35,000 of RMD directly to charity using a QCD

Nonportfolio income: $50,000

Annual RMD: + $110,000

QCD: – $35,000

Pretax income: = $125,000

Itemized deduction: – $15,700

Taxable income: = $109,300

Estimated taxes due: $19,632

Note: Illustration is for example purposes only and is not intended to be tax advice. RMD amount is approximate and assumes an IRA balance of $2.5 million. Itemized deduction assumes the cash donation only and does not include other itemizations. Tax calculations are estimated using 2023 federal tax brackets, do not reflect state taxes, and assume that 85% of Social Security benefits are taxable. In 2023, the standard deduction for a single filer age 65 and older is $15,700 ($13,850 standard deduction plus $1,850 additional standard deduction).

"That said, you don't necessarily want to give away money just to get a tax break," Hayden says. "But if philanthropy is already part of your financial plan, a QCD can be a great way to optimize the tax benefits of giving."