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Reducing RMDs With QCDs

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.