Charitable Giving with a Tax Advantage: Using Your IRA for Good

Written by: Brady Martin, Wealth Management Advisor

In retirement, many people find that giving back to their communities plays an important role in their lives. Whether it’s funding medical research, supporting your alma mater, community organizations, or other important causes, charitable giving can provide a meaningful use of your wealth. When it comes to causes you care about, most people think of writing a check, setting up recurring donations, or volunteering time, but there may be another powerful option. If you’re over the age of 70½, you may be able to make Qualified Charitable Distributions (QCDs) from your IRA or retirement plan which could provide a way to both support your favorite charities and lower your tax bill.

What is a QCD?

A Qualified Charitable Distribution allows you to transfer money directly from your IRA to a qualified charity. The amount you give counts toward your Required Minimum Distribution (RMD), but it doesn’t count as taxable income.

What is a Required Minimum Distribution (RMD)?

Retirement accounts funded with pre-tax contributions, such as Traditional IRAs and 401(k)s, are subject to required minimum distributions (RMDs) which are annual mandatory minimum withdrawals. Contributions to these accounts go in before income taxes are applied, reducing taxable income for the contribution year. The investments then grow tax-deferred, but withdrawals in retirement are taxed as ordinary income. RMD’s are designed to ensure taxes are eventually paid on these funds, and the required amount is based on your age and account balance.

Required Minimum Distributions (RMDs) must begin by April 1st of the year after you reach your applicable RMD age, based on your birth year:

• Born 1950 or earlier: RMDs may have already started under earlier rules.

• Born 1951–1959: RMDs must begin by April 1st of the year after you turn 73.

• Born 1960 or later: RMDs must begin by April 1st of the year after you turn 75.

It is important to note that although the first RMD can be delayed until April 1 of the following year, all subsequent RMDs must be taken by December 31 each year. If you don’t take your RMD you could face a penalty of up to 25% of the required distribution amount.

QCD Advantages

• Reduce Taxable Income: Unlike taking an IRA withdrawal, which is usually fully taxable, a QCD is excluded from your income entirely. This directly reduces your taxable income which reduces your tax liability and could keep you in a lower marginal tax bracket.

• Satisfy RMD Requirements: If you’re required to take minimum distributions, then QCDs can fulfill this requirement entirely or in part without increasing your taxable income.

• No Need to Itemize: To deduct charitable contributions, you generally need to itemize deductions on your federal income tax return. Many retirees take the standard deduction leading to their charitable gifts not producing additional tax benefits. By using QCDs, you can reduce your tax liability without the need to itemize deductions, since the donation is excluded from your income altogether.

• Potentially Lower Medicare Premiums: QCDs reduce your adjusted gross income (AGI), which helps lower your income for purposes of determining Medicare Part B and D premium surcharges under the IRMAA brackets.

Rules to Keep in Mind

• You must be age 70½ or older on the date of the distribution (no matter what age your RMDs begin).

• The donation must come from a Traditional IRA (not a 401(k)).

• The funds must be sent directly from your IRA custodian to the qualified charity (not to you first).

• The annual limit is $100,000 per person ($200,000 for married couples filing jointly if both make QCDs).

• QCDs cannot be made to donor advised funds, private foundations, or supporting organizations.

A Smart Giving Strategy

Here’s an example:

Your RMD for 2025 is $20,000 and you’re in a 22% marginal tax bracket. If you take the entire distribution as income, you’ll owe $4,400 in federal income taxes. If instead you decide to donate $10,000 in total between your five favorite qualified charities. The $10,000 donated will count towards your RMD and you won’t have to pay taxes on it, effectively reducing your tax liability by $2,200.