Answers to Common Questions About QCDs

Many AAII members asked questions in response to Brian Dobbis’ article on qualified charitable distributions (QCDs) in the May 2024 AAII Journal. QCDs are donations made from an individual retirement account (IRA). In today’s Investor Update, I answer several of those questions.

1. When Can I Start Making QCDs? You can start them once you turn 70½. This start date is before the required beginning date (RBD) for taking required minimum distributions (RMDs), which is currently the year you turn 73.

2. In What Order Must QCDs and RMDs Be Taken? The key here is the first-dollars-out rule. The first amounts withdrawn from an IRA satisfy the RMD rule for that calendar year. Using the example in Dobbis’ article, Tanya has a $5,000 RMD. If she withdraws all $5,000 first, her RMD is satisfied for the year. She cannot go back later in the year, make a $5,000 QCD and then assume it offsets the first withdrawal of the year. She still owes taxes on the first $5,000 distribution. If she only makes a $5,000 QCD and takes no other distributions from her IRA for the calendar year, she will reduce her taxable income by $5,000.

If you intend to take both QCDs and taxable distributions, do the QCD first. Then allow enough time for the QCD transaction to be completed. (Check with the charity to be sure the donation has been received.) Wait to take your taxable distributions until after the QCD transaction is completed.

3. Why Would I Make a QCD Before I Start an RMD? There is no immediate tax benefit to making a QCD before your RBD other than moving money out of your IRA on a tax-free basis.

The big reason for making a QCD before reaching your RBD is the reduction in future taxable income. RMDs are based on an IRA’s calendar-year-ending balance. Any distributions made before the year you turn 73 will reduce the balance that the first RMD will be calculated on. Those distributions will also reduce all future RMDs by creating a smaller balance on which to realize compounded returns.

4. Why Opt for a QCD Instead of Directly Donating to a Charity? QCDs reduce your adjusted gross income (AGI) dollar-for-dollar. If you take the standard deduction, this is a big benefit. If you itemize, QCDs still lower your AGI dollar-for-dollar. AGI is used in determining certain tax credits and deductions. Modified forms of AGI are used for calculating how much of your Social Security benefits are taxed and what you will pay in Medicare premiums two years from now.

Charitable donations made from a taxable account do not reduce your taxable income until after your AGI has been calculated. They will not reduce how much of your Social Security benefits are taxed or what you will pay in Medicare premiums two years from now like QCDs do.

5. Which IRA Accounts Qualify for QCDs? QCDs can be made from IRA accounts, including inherited IRAs. If you roll over a 401(k), 403(b) or 457(b) plan account to a traditional IRA, then you can make a QCD from that “rollover” IRA. QCDs can also be made from inactive Simplified Employee Pension (SEP) IRAs or Savings Incentive Match Plan for Employees (SIMPLE) IRAs, meaning no employer contributions were made during the plan’s year ending with or within the IRA’s taxable year in which the charitable contribution would be made (per Fidelity). Roth IRAs are generally not eligible for QCDs.