Reducing RMDs With QCDs

For retirees who've accumulated significant savings in their tax-deferred accounts, the onset of required minimum distributions (RMDs) at age 73—or 75 for those born in 1960 or after—can have serious tax consequences. That's because the higher the balance in your tax-deferred accounts, the higher your RMDs—and potentially your tax bracket.

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 from their IRA accounts Generally, you can make a QCD from any tax-deferred IRA account, such as a traditional IRA, inherited IRA, SIMPLE IRA, and SEP IRA. However, a direct transfer of a QCD from a SIMPLE or SEP IRA can only be done if the account is inactive—meaning you're no longer contributing to it. That said, the IRS does not allow you to make a charitable contribution from a workplace retirement plan, like a 401(k).

For tax year 2025, you can donate up to $108,000 ($115,000 for 2026), and you can also use up to $54,000 of a QCD to make a one-time donation to a charitable remainder trust (CRT) or charitable gift annuity (CGA). For married couples, you can each donate up to your individual annual limit.

A QCD doesn't offer a tax deduction, but the QCD amount isn't included in your taxable income either. In some cases, the tax benefits of a QCD could outweigh the charitable deduction you would have received from donating cash or other assets to an eligible charity.

Taking your full RMD and then donating cash could result in a higher tax bill than if you were to give through a QCD. Let's look at an example of when a QCD could make sense. Say you're 75 years old and single, and you need $125,000 in income this year to cover your living expenses. Your RMD for the year is $110,000 and you'll receive another $50,000 from a pension and Social Security—pushing your total taxable income to $160,000. That leaves you with an additional $35,000 of income that you don't need.

If you're charitably inclined, you could donate the excess cash to your favorite charity and write-off the amount on your tax return. But by using a QCD to transfer the $35,000 directly to a charitable organization, you could potentially pay $4,260 less in income taxes.

You don't necessarily want to give away money just to get a tax break. But if philanthropy is already part of your financial plan, a QCD can be a great way to optimize the tax benefits of giving. Your financial advisor and tax professional can help make sure your giving strategy aligns with your retirement goals as well as any changes to tax rules.