What Is a QCD and How Does It Work?

You might expect your tax burden to decrease in retirement – after all, you’re no longer receiving a paycheck that incurs income tax, payroll tax, and Medicare tax. However, your income in retirement could be significant between investment income, rental properties, pensions, Social Security, and retirement account withdrawals. Then starting at age 72, you will likely need to take Required Minimum Distributions (RMDs) from your traditional retirement accounts, which could potentially increase your taxable income. So, how can you work to minimize those taxes? One potential strategy is to do a Qualified Charitable Distribution.

What Is a QCD?

A Qualified Charitable Distribution (QCD) is a withdrawal from an IRA directly given to a qualified charity and not subject to tax.[1] A QCD counts towards your RMD for the year and can be a way to give to a charity you want to help while reducing your tax burden. For retirees who don’t need all of the money they are required to withdraw each year from their IRA, a QCD is a potential option for meeting RMD requirements without increasing their tax basis.

What Are the Rules?

First of all, contributions must be made to an eligible charity approved by the IRS. These include 501(c)(3)s and houses of worship but not donor-advised funds. In order to qualify for the tax break, distributions must be made directly to the charity, not withdrawn as income and then donated. IRA owners must be at least 70 ½ years old to make a QCD, although RMDs do not actually begin until age 72. An IRA owner can withdraw as much of their IRA per year as they want but can only make a QCD of up to $100,000 per year.[2] The right time to make a QCD and how much to give depends on your unique situation, and we can help you strategize as well as explore other tax minimization methods.