How qualified charitable distributions (QCDs) work: Rules, pros & cons

If you are 70½ or older, you have the option to use money in your IRA to create a fund that supports charity through qualified charitable distributions (QCDs). To make the most of this opportunity, it's worth digging into the details of how QCDs work, which charities qualify, and the pros and cons of using them.

A qualified charitable distribution is the direct transfer of assets from your IRA to a qualifying charity that counts toward annual required minimum distributions (RMDs).

The SECURE Act 2.0 changed the RMD age limits to a sliding scale:

• If you were born in 1950 or earlier, you must start RMDs at age 72.
• If you were born from 1951 to 1959, you can delay your RMD age to 73.
• If you were born in 1960 or later, your RMD start age is 75.
  

A QCD allows you transfer up to $105,000 per year from your IRA. This amount will be indexed for inflation annually. If you are married, you and your spouse can each make QCDs of up to $105,000 per year. The limit applies per person because retirement accounts are individually owned.

When you donate assets from your IRA to one or more qualifying charities via direct transfer, your QCD will avoid taxation. That said, because the distribution is not counted as income to you, it isn't eligible for the charitable deduction on your federal tax return. Also, state income tax treatment may differ from federal law.

You must make QCDs by Dec. 31 for them to count toward your annual RMD. The receiving charity must provide written acknowledgment of your donation, just as it would if you were making any other donation.

Charities that are eligible for a QCD are IRS-recognized entities known as 501(c)(3) organizations. To verify whether a charity qualifies for a QCD, start with the IRS tax-exempt organization search tool.

Some entities are involved with charitable giving but do not qualify for a QCD, including:

• Donor-advised funds. These are vehicles that are maintained and operated by a qualifying 501(c)(3) sponsoring organization and which manage donations on behalf of charitable organizations.
• Private foundations. Although they may receive some public funding, these foundations are typically funded privately from one individual or a small group of people.
• Supporting organizations. These entities may support public charities, but they are not IRS-recognized entities themselves.

A QCD may go to an eligible charity from the following types of individual retirement accounts:

• Traditional IRA
• Inherited IRA
• Inactive Simplified Employee Pension (SEP) IRA
• Inactive Savings Incentive Match Plan for Employees (SIMPLE) IRA

Active SEPs, 403(b)s and 401(k)s are not eligible. Neither are profit-sharing, pension or active SIMPLE plans.

The following is based on a donor who worked with Thrivent Charitable:

The donor: A woman in her 70s wanted to provide permanent support to her church using QCDs. She did not need IRA income, but was required to take minimum distributions, which put her into a higher tax bracket.

Her gift. The donor created a charitable fund (non-advised) with a $100,000 QCD each year for two years. Her fund makes annual grant distributions to her church in perpetuity.

The SECURE Act 2.0 made it possible to also give a one-time annual gift of up to $53,000 (indexed annually for inflation). For the gift to count, it must come from your IRA by Dec. 31.

The gift can go to:

• A charitable remainder unitrust.
• A charitable remainder annuity trust.
• A charitable gift annuity.

These split-interest entities allow the donor to receive a financial benefit for life or for a set term, with the eventual remainder interest going to charity

Learn more about how the SECURE Act 2.0 affects retirees

QCDs are distributions from an IRA that are not included in your adjusted gross income. This unique feature enables several potential tax benefits, such as:

• Making RMDs while potentially reducing taxes. By reducing otherwise taxable IRA distributions, QCDs can reduce your adjusted gross income (AGI) while also satisfying the IRS's RMD requirements.

• Potentially avoiding higher tax brackets. Since QCDs reduce taxable income, less income will be subject to your marginal tax rate, and your highest marginal rate may fall.

• Avoiding higher Medicare premiums. Making a QCD reduces your modified adjusted gross income (MAGI) for Medicare purposes. In 2024, most people will pay a $174.70 monthly premium for Medicare Part B. However, single tax filers who had incomes over $103,000 and joint filers who had incomes above $206,000 in 2022 pay premiums starting at $244.60. (Premiums are based on your taxable income two years prior.) Premiums continue to rise with income, climbing as high as $594.00 once MAGI reaches $500,000 for single filers and $750,000 for joint filers.

QCDs are not right for every situation, so consider these potential benefits and drawbacks.

• Tax benefits. QCDs can provide tax advantages by lowering your AGI. This, in turn, can help lower other taxes, like those on Social Security.

• Charitable impact. Some decisions are about more than finances. You'll make a difference in the world when you use QCDs to contribute to your favorite qualifying charities.

• Age requirement. Only IRA owners age 70½ and older may make QCDs.

• Limits on contributions. The maximum QCD is $105,000 in 2024. In addition, a one-time annual distribution of $53,000 applies to QCDs to charities through charitable gift annuities, charitable remainder unitrusts and charitable remainder annuity trusts. The one-time $53,000 distribution counts toward the $105,000 limit for that year. These amounts are subject to annual adjustments for inflation.

6 ways to use your RMDs

Here’s an overview of how required minimum distributions work, along with six ways you might use these savings if you don't need them for living expenses.

Consider these RMD options

There are other beneficial ways to use QCDs through working with charitable foundations, such as Thrivent Charitable Impact & Investing^®.

• Charitable fund. Use your QCD to create a charitable fund and select your favorite charities to receive annual grants, either for a term of years or in perpetuity. Your charitable donations remain in place for the life of your charitable fund. (Under federal tax law, you may not add or remove benefiting charities or change the distribution plan.)

• Charitable gift. Use your QCD to make a significant charitable gift upon death using life insurance. Your QCD pays ongoing premiums to a life insurance contract that names a charitable foundation as owner and beneficiary. The contract's proceeds may be directed to your charitable fund to support one or more of your chosen charities.