When you think of goals for retirement, supporting a church, school, local library, or other charitable organization, is an aspiration that many retirees share.
But did you know that supporting a charity can also have benefits to your own financial plan? That is, if you’re 70 ½ or older.
Qualified Charitable Distributions (QCDs) allow you to transfer funds from an eligible IRA to a qualified charity tax-free, while also lowering your taxable income and satisfying your RMDs. This blog details what a QCD is and how it could be a piece in your overall retirement planning puzzle.
Key Takeaways:
Before we get into how QCDs can be valuable in your overall retirement strategy, let’s go over what it is exactly.
A Qualified Charitable Distribution allows individuals age 70 ½ and older to make tax-free donations from an IRA account to a qualified charity. Qualified charities could include any tax-exempt organization such as a church, educational institution, public nonprofit, veteran’s organization, or fraternal society, just to name a few.
In most cases, you can make a QCD from any tax-deferred IRA such as a traditional IRA, inherited IRA, SIMPLE IRA or a SEP IRA. However, direct transfers of a QCD from a SIMPLE or SEP IRA can only be done if you are no longer contributing to that account. The IRS also does not allow you to make charitable contributions from a workplace retirement plan such as a 401(k).
For contributions to be tax-free, the funds must be sent directly from an IRA to the receiving charity and cannot be withdrawn into another personal account and then used to write a check.
Each tax year, the limit for QCDs can change. For 2026, the limit is $111,000 per individual. You can also use $55,000 of that $111,000 limit to make a one-time donation to a charitable remainder trust (CRT) or a charitable gift annuity (CGA).
Like with any financial strategy, leveraging QCDs might not be right for everyone, or at any time. Here are a few situations in which a QCD could be right for you:
Lowering Your Taxable Income: The money you take from an IRA to a QCD is tax-exempt and is not counted towards your taxable income. If you are 70 ½ or older and concerned about your level of taxable income, for tax season or other reasons like IRMAA surcharges, taking advantage of QCDs could be a smart strategy to lower your taxable income by as much as $111,000 per individual per year.
Because QCDs lower your adjusted gross income, it also can reduce how much your Social Security benefits are taxed.
Satisfying Your Required Minimum Distribution (RMD): If you have reached your RMD age, QCDs can be a great option for satisfying your RMDs while not counting towards your taxable income. To ensure that you are properly donating to the charity of your choice and that it fully counts toward your RMDs, consider working with your financial adviser or IRA custodian.
Most likely you will need at least some of your RMDs to help cover your retirement expenses. But for those who don’t need all the money, it makes sense to try to manage your tax burden and keep that money working for your retirement goals. Read our blog for more Ways That You Can Lower Your RMD Taxes.
Spending Down an Inherited IRA for the 10-Year Rule: When you are a non-spouse inheriting an IRA, the entire amount of the IRA must be withdrawn within 10 years of the original account holder’s death. But this doesn’t mean you must take withdrawals in equal installments over the course of the 10 years.
Depending on the size of the IRA, it might make sense to take it out all at the end, or at the beginning.
Just as it works for your own IRAs, you may make a QCD from an inherited account, as long as it is going directly from that account to the qualified charity. This could be a great option for managing your taxable income when you must coordinate your own personal RMDs, other income sources, on top of the 10-year rule of an inherited IRA.
Supporting a Meaningful Cause: Aside from the financial advantages of leveraging QCDs, there is the opportunity to put your hard-earned savings towards a cause or organization and make a difference for potential generations to come.
Maybe it could be supporting the church you’ve been going to for decades, your alma mater university, or even an organization researching cures for a disease that has impacted you or a loved one. Whatever the organization may be, a donation of any size could have a positive impact now and into the future.
If you’re over the age of 70 ½ and you have money you’re unsure how to coordinate, whether it be from an inherited IRA or fulfilling your ever-increasing RMDs, leveraging QCDs could be a vital piece in your retirement strategy. Not only is it a way to help people and causes beyond yourself and your family, but it can also decrease your taxable income and potentially decrease your overall tax obligation.
But maximizing this strategy takes skillful coordination with your income sources, your age, and your RMDs. A financial adviser will be able to get a birds-eye look at your entire financial situation to suggest a tax-efficient strategy as you move throughout your retirement.
If you want to talk with an adviser to see if QCDs may be right for you at this time, schedule a complimentary consultation with one of our advisers.