Plan QCDs Early in the Year and Before Your RMDs

At the start of a new year, one of the first actions many of my readers should take is to plan the year’s qualified charitable distributions (QCDs) and required minimum distributions (RMDs) from traditional IRAs.

QCDs should be considered first, because they can reduce the income taxes on your RMDs. Even if you don’t have to take RMDs yet, when you’re at least age 70½ taking QCDs during the next few years can reduce the amount of future RMDs and the income taxes on your IRA.

For too many people, QCDs are an afterthought, something they don’t consider until late in the year. That can mean lost opportunities and a lot of money left on the table.

The QCD is one of the most powerful tax and charitable-giving tools. It probably is the best way for anyone over age 70½ to make charitable contributions, with the possible exception of donating highly appreciated investments held in taxable accounts.

A QCD is a much better way to donate than writing a check.

Since most people now don’t itemize expenses on their tax returns, they don’t receive a tax deduction or other benefit for charitable contributions.

A QCD is a special way of making charitable contributions from a traditional IRA.

Suppose you want to use a traditional IRA to make a charitable gift.

One option is to take a distribution from the IRA and write a check of the same amount to a charity. Another option is to have the IRA custodian transfer money directly to a charity.

In either case, when the distribution isn’t a QCD, the distribution is included in your gross income and taxed.

It’s a different story when the gift is a QCD.

A QCD isn’t included in your gross income. The tradeoff is that you don’t receive a charitable deduction.

Another advantage of a QCD is, if you must take an RMD from the traditional IRA that year, the QCD counts toward the RMD. You can satisfy all or part of the RMD without having to include it in gross income to the extent you make QCDs.

So, by making your charitable contributions as QCDs, the money is out of your traditional IRA without increasing your tax bill. You took the RMD for the year tax free.

If you don’t have to take RMDs yet, you benefited charity and took a distribution from the IRA tax free. Reducing the value of the traditional IRA also reduces future RMDs.

The non-IRA money you would have donated to charity is freed up to pay other expenses.

QCDs are such a good deal that, of course, Congress requires you to jump through certain hoops for a distribution qualify as a QCD.

The first rule is the traditional IRA owner must be at least age 70½ on the date of the transfer from the IRA to the charity.

Suppose you had money transferred from the traditional IRA to a charity in March and turned 70½ in September. That distribution in March wasn’t a QCD, because you weren’t 70½ yet; it will be included in your gross income.

The charitable contribution must be made directly from the traditional IRA to a charity. There are several ways the direct distribution can be made.

The IRA owner can instruct the IRA custodian to transfer the money to a named charity or charities. Or the IRA custodian can give the owner a check made payable to the charity that the owner delivers to the charity.

Some custodians give checkbooks to IRA owners. The owners make IRA distributions by writing checks against their IRAs. A QCD can be made by making such a check payable to a charity.

A transaction doesn’t qualify as a QCD when you take a distribution from a traditional IRA and you make a contribution to charity of the same amount during the year. The money or property must go directly from the IRA to charity to be a QCD.

There’s a potential timing problem when writing a check against the IRA. In its annual report to the IRS, the IRA custodian will report the check as a distribution in the year the check cleared. If you write a check in late December and it doesn’t clear until early January, the custodian could report it as a distribution made in January.

If the QCD was intended to be part of your RMD the previous year, you’ll miss taking all or part of your RMD by Dec. 31 and could be liable for penalties.

QCDs can exceed your RMD for the year. If your RMD is $10,000, and you want to give $20,000 to charity during the year the entire $20,000 contribution can be made from the IRA as a QCD. But only $10,000 will count as an RMD. There’s no carryover of the additional QCD to satisfy next year’s RMD.

You don’t have to be subject to RMDs to take a QCD. QCDs can be made by any traditional IRA owner who is age 70½ or older, though after recent law changes RMDs don’t begin until age 73.

It’s important to plan QCDs and RMDs early in the year to avoid potential traps in the tax code for those who aren’t careful.

When you are subject to RMDs, the first distributions from traditional IRAs for the year are considered RMDs and included in gross income.

Some people take distributions from their IRAs early in the year. Later, they learn about QCDs or decide they want to make QCDs. They can’t reverse those earlier RMDs (except in limited cases within 60 days of the distribution) or turn them into QCDs.

The distributions early in the year are RMDs and must be included in gross income. If the year’s RMDs haven’t been fully satisfied, QCDs can be taken to satisfy the rest of the year’s RMDs.

Making QCDs early in the year also is a good idea when you’re planning to convert all or part of a traditional IRA to a Roth IRA and are subject to RMDs.

The rule is that when you convert IRA assets, you first must take any RMD for the year. If you take the RMD as a regular distribution, it’s included in gross income. Then, the converted amount also is included in gross income. The RMD effectively adds to the tax cost of the conversion, because you must take the RMD first.

But when you take the RMD as a QCD, it isn’t included in gross income. The QCD effectively reduces the cost of the conversion, plus you benefit charity.

There’s an annual limit per taxpayer (not per IRA) on QCDs that now is adjusted annually for inflation. The maximum QCD was $105,000 for 2024 and increased to $108,000 for 2025.

In a married couple, each spouse has a separate limit. They share the limits or split the QCDs.

If one spouse wants to make more than $108,000 of charitable donations in 2025, he or she can’t use part of the other spouse’s QCD limit. If the couple wants to have $216,000 of QCDs in 2025, each must donate $108,000 from his or her traditional IRA.

Even if your RMD for the year exceeds $108,000, no more than $108,000 of distributions can be QCDs.

Charitable contributions from a traditional IRA that exceed the year’s QCD limit will be non-QCD distributions that are taxable as described earlier.

Unused portions of the annual limit don’t carry forward to future years. The annual ceiling is a use-it-or-lose-it limit.

Only pre-tax money can be used to make a QCD. That means any nondeductible contributions (after-tax money) in a traditional IRA can’t be used to make QCDs. You can instruct the custodian to use only pre-tax money to make QCDs. After-tax money stays in the IRA.

In general, QCDs can be made only from traditional IRAs. They can be made from simplified employee pensions (SEPs) and SIMPLE IRAs only when the plan hasn’t received an employer contribution in the plan year that ends with or during the calendar year in which the charitable contribution is to be made. In other words, the SEP or SIMPLE IRA must be inactive.

Other retirement plans, including 401(k)s, don’t qualify for QCDs.

Inherited IRAs can be used to make QCDs.

Technically, you can make a QCD with the accumulated earnings in a Roth IRA but not with any of the contributions. But you probably don’t want to make a QCD from a Roth IRA, because the distributions are tax free anyway, and original owners of Roth IRAs aren’t subject to RMDs.

Even when all the requirements are met, a distribution isn’t a QCD if the IRA owner receives any benefit from the donation. Any small gift or reward from the charity makes the entire contribution ineligible for a QCD.

Also, you must follow the rules for proving charitable contributions. You need an acknowledgement in writing from the charity regarding the amount and date of the contribution. For large donations, additional proof might be required.

Only donations to public charities qualify. Contributions to private foundations, donor-advised funds and tax-exempt groups other than public charities aren’t QCDs.

A contribution from an IRA to fund a charitable gift annuity or charitable remainder trust doesn’t receive QCD treatment. But for an exception, see the rules for the new Legacy IRAs discussed in our June 2023 issue.

The SECURE Act permits contributions to traditional IRAs after age 70½. It also prohibits an individual from combining a QCD with deductible IRA contributions made after age 70½. Details of these rules are in our November 2020 issue, which is available in the Archive of back issues on the members’ section of the website.