How to Use a Qualified Charitable Distribution (QCD) to Save on Taxes

If you have a traditional IRA and are age 73 or older, you’re likely familiar with required minimum distributions (RMDs). These are the annual IRA withdrawals the IRS mandates once you reach a certain age. These withdrawals are based on your life expectancy and increase as you get older. Unfortunately, RMDs are considered taxable income, which can create an unwelcome tax burden for retirees.

Using a Qualified Charitable Distribution

However, if you have a charitable heart, there’s a smart way to meet your RMD requirement while minimizing your tax liability: a qualified charitable distribution (QCD).

A QCD allows you to transfer funds directly from your IRA to a qualified 501(c)(3) charity, such as a church, school or nonprofit organization. The beauty of a QCD is that the donated amount counts toward your RMD but is excluded from your taxable income. Even if you don’t itemize deductions, you can still enjoy the tax benefits of charitable giving through a QCD.

Here’s how a QCD can help you:

• Satisfy all or part of your RMD for the year
• Support the charitable causes you care about
• Avoid increasing your taxable income
• Reduce the risk of being pushed into a higher tax bracket

When Can you Start Making QCDs?

Even though RMDs start at age 73, you can begin making QCDs as soon as you turn 70½. For 2025, the QCD limit is generous: you can donate up to $108,000 per person per year. If you’re married and filing jointly, each spouse can contribute up to $108,000 from their own IRA— allowing a combined total of $216,000.

Important Rules to Understand

Keep in mind that QCDs must be made directly to eligible charities—donor-advised funds (DAFs) and private foundations do not qualify. To ensure proper handling, it’s best to have your IRA trustee transfer the funds directly to the charity. Also, be sure to request a written acknowledgment from the charity for your records.

If you plan to take multiple IRA withdrawals during the year, it’s crucial to make your QCD first. The IRS treats your first withdrawal as your RMD. By prioritizing the QCD, you ensure it counts toward your RMD requirement.

Finally, don’t forget to inform your tax preparer if you make a QCD. Proper reporting is key to preserving the tax benefits. At Illumination Wealth, we’re here to guide you in using strategies like QCDs to optimize your retirement income and minimize taxes. Contact us today for more information and personal tax planning guidance.