The end of the year marks the time when many people are doing two things simultaneously. First, they are deciding how much (or how much more) they can afford to give to their favorite charities before year-end.

Second, they are ensuring that they have taken any remaining required minimum distributions, or RMDs, and maybe thinking through how to limit the associated income tax burden.

For some, utilizing the qualified charitable distribution, or QCD, for the RMD might be the solution.

RMDs

A RMD is the federally-mandated minimum amount a person must withdraw from his or her individual retirement account, or IRA, every year after age 73.

The requirement for withdrawal applies to other pre-tax retirement plans as well, such as 401(k)s, 403(b)s, 457(b)s, etc., but for purposes of simplicity, I will use the term “IRA.”

Because the money going into an IRA hasn’t yet been taxed, when it comes out of the IRA, the owner must pay ordinary income tax on the amount withdrawn.  

Accordingly, some folks who need to take RMDs before the end of the calendar year bristle at the prospect of paying ordinary income tax on the withdrawal. Some even wish they didn’t need to withdraw anything from the IRA so they could avoid pushing their income (and associated marginal income tax rate) higher.

Regrettably, the law doesn’t allow the money to stay in the IRA without incurring a burdensome penalty. But the law does allow an opportunity for an individual to take the money out and give it directly to a charity without increasing his or her income (and associated marginal income tax rate) through a QCD.

QCD

A QCD allows a direct transfer from your IRA to a charitable organization of up to $105,000 (for 2024).

Though a person who transfers a QCD to a charity is not allowed to take a charitable deduction on their income taxes, he or she gets something that is likely more powerful: the exclusion of the QCD amount from ordinary income and an offset against any RMD requirement.

This type of distribution has several benefits.

First, it can keep the donor from entering a higher tax bracket and subjecting a higher percentage of his earning to taxes. Second, it also can prevent certain tax phaseouts that apply as taxpayers report higher income.

Though RMDs are required of a variety of pre-tax accounts as listed above, QCDs are not available to the same accounts. Generally, a QCD is not available to employer-sponsored accounts such as 401(k)s, 403(b)s, or 457(b)s.

Coordinate QCD and RMD

If you have an employer-sponsored plan that is not eligible for the QCD, an easy approach is to roll that plan into an eligible IRA. The assets would maintain their status as pre-tax qualified retirement monies but are housed in an IRA allowing qualification for the QCD.

As an additional bonus, an IRA often offers expanded investment options beyond that offered by employer-sponsored plans.

When deciding to do a QCD, pay attention to any amount already withdrawn throughout the calendar year to satisfy RMDs, as this money cannot be offset by a later QCD. In other words, QCDs should be considered before any portion of an RMD is withdrawn.

A QCD need not be tied directly to an RMD amount, but it can offset any RMD. For example, if the RMD is $10,000, then a QCD for $10,000 would satisfy the RMD for the year. A QCD for $5,000 would offset the RMD such that the account owner would need to withdraw (and recognize as income) the remaining $5,000 of the $10,000 RMD amount.

QCD to charitable trusts

In addition to distributions to charities, a QCD of up to $53,000 (for 2024) can be directed one time to so-called “split interest” trusts like a charitable remainder trust or a charitable gift annuity.

Given the relatively modest amount allowed to go to a split-interest trust (and the fact that it can’t be commingled with other non-QCD assets) and the cost associated with establishing a charitable remainder trust, a charitable gift annuity likely will make the most sense for folks interested in this option who both want to make a contribution to a charity but also value the security of a continuing income stream for life.

If you count yourself in the group of people looking at RMDs and charitable giving, consider the QCD. Talk to your legal and tax professionals to see if it’s the best option for you.

Beau Ruff, a licensed attorney and certified financial planner, is the director of planning at Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.