If you are over 70.5, taking Required Minimum Distributions (RMDs), and want to support charities, a Qualified Charitable Distribution (QCD) is almost always going to be your most tax-effective giving strategy. 

A QCD is a direct contribution from an IRA to a qualified charity. This not only benefits charitable causes but also reduces your Adjusted Gross Income (AGI) and fulfills your RMD for the year. 

Many of the deductions and credits that taxpayers can take advantage of are subject to AGI or income limitations. Examples of how a lower AGI/Taxable income are beneficial to taxpayers include the following: 

1. If you itemize deductions, you can deduct medical and dental expenses only in excess of 7.5% of your AGI. Therefore, the lower your AGI is, the more of your medical and dental expenses you can deduct. For example, if your AGI is $100,000, 7.5% is $7,500 and all expenses over $7,500 are deductible. If your AGI is $50,000 then the threshold is only $3,750. 

1. Your Medicare part B & D premiums are also based on your AGI. 

1. Although not based on AGI, the taxability of your Social Security is based on total income, which is also increased by RMDs. 

1. Under the new tax law with a larger standard deduction, your charitable gifts may not have any impact on your taxes if the sum of all your itemized deductions is less than the standard deduction. A QCD reduces your reportable income by the amount of the QCD, independent of the standard deduction, which has the same impact as if the charitable gift was fully deductible. 

SECURE Act 2.0 – Changes to Consider

Following the SECURE Act 2.0 going into law in late 2022, there are two main changes to be aware of when considering QCDs. 

• The age that you must begin taking RMDs at has been raised to age 73 or 75, depending on your date of birth. It is important to note that QCDs can still be made starting at age 70.5 regardless of when RMDs are set to begin. 

• The annual limit for QCDs has been increased to $105,000 per year and is now adjusted for inflation. As a result, if an account owner knows they will not need the funds from their IRA once RMDs begin, they can start writing QCD checks at age 70.5 to purposefully draw on the balance of the account to manage the future RMD amount. 

RMDs and Cash Flow

It is important to remember that when making QCDs when RMDs are required, they should be part of your RMD not in addition to it. Additionally, if you are taking IRA withdrawals monthly as part of our DIESEL® withdrawal system, consider reducing your periodic withdrawal amount and allocating some of your RMDs as a QCD early in the year so your total required withdrawal, including your QCD, does not exceed your RMD.  

As a reminder, the DIESEL system creates cash flow distributions by harvesting the total return of their portfolio, including dividends, interest, and growth, rather than relying solely on income. It combines an optimized portfolio with a rebalancing process to maintain the desired risk/return profile and to provide more sustainable distributions compared to a traditional income-focused portfolio. 

We typically recommend executing QCDs no later than November 1st to ensure completion by year-end. Keep in mind that QCD checks must clear from the IRA by December 31st to count for the year, and charities may experience delays in cashing checks received towards year-end due to increased volume. 

If you are interested in learning more about QCDs and if this option makes sense for you, more detailed information can be found here. Your advisor would also be happy to answer any questions you may have, and set up a QCD, including check writing ability, for you.