Tax Advantaged Uses of your IRA: The Beauty in Qualified Charitable Distributions

By Stephany Pedigo

Qualified charitable distributions (QCDs) can result in significant (even beautiful) tax savings for charitably minded IRA owners over the age of 70 ½. This article will address some common QCD questions. 

What is a QCD?

A QCD is a distribution you direct the custodian of your IRA to make directly from your IRA to a qualified charity. A QCD is NOT a distribution from your IRA to you or your DAF and then a contribution to charity. A QCD is also not a distribution from your 401(k).

Who is eligible to make a QCD?

Anyone with an IRA who is over the age of 70 ½ . 

What are some tax advantages of making a QCD? 

Reduce Taxable Income. A QCD will reduce taxable income by the amount of the distribution up to $108,000 per individual (married couples who each own an IRA may reduce income for a combined $216,000) per tax year. 

Satisfy RMDs. A QCD can also satisfy a taxpayer’s RMD. Remember, if you plan for your QCD to satisfy part of your RMD, the first dollars out of an IRA are considered RMD. 

Social Security and Medicare. The lower tax bracket and adjustment on adjusted gross income (AGI) may also reduce the taxable amount of Social Security income received – which means keeping more Social Security income on an after-tax basis and potentially also lowering Medicare part B and D premiums because high income beneficiaries of Medicare pay an additional amount known as Income Related Monthly Adjustment Amount (IRMAA). The lower your income, the lower your IRMAA.

Can you show me a math example of utilizing a QCD?

Assume:

75-year-old single IRA owner
RMD of $140,000
Pension and Social Security benefits of $50,000
Intent to make $35,000 charitable gift

Example 1: Take full RMD and donate $35,000 in cash (NO QCD)

QCD: 0
Pension and Social Security Benefits: $50,000
RMD: $140,000
Adjusted gross income: $190,000
Itemized deduction: -$35,000
Taxable income: $155,000
Estimated taxes due: $30,047

Example 2: Donate $35,000 of RMD directly to charity using QCD

QCD: -$35,000
Pension and Social Security Benefits: $50,000
RMD: $140,000
Adjusted gross income: $155,000
Standard deduction: $-17,750
Taxable income: $137,250
Estimated taxes due: $25,787

Assuming the facts above, the decision to make a QCD resulted in a $4,260 tax savings. The taxpayer had the same income and made the same donation to charity – the use of the QCD was the difference maker. 

Where can QCDs be made?

QCDs can be made from your IRA to eligible charities. The Generosity Trust (TGT) is a charity eligible to receive your QCD. While QCDs may not be made to donor advised funds (DAFs), you can direct your QCD to existing TGT designated funds over which you are not an advisor and/or you may establish a single charity fund (SCF) at TGT over which you are an advisor to receive QCDs and benefit a specific charity of your choosing. 

Designated Funds. TGT has established designated funds which are eligible to receive QCDs. These funds include:

TGT Disaster Relief Fund – provides assistance to those in our community affected by natural disasters. 

TGT Generosity Fund – provides grants to local Chattanooga ministries who provide assistance and relief to Chattanooga families. 

Single Charity Fund (SCF).   At TGT, you can create a fund to receive your QCD and to benefit a charity of your choosing. At the time you establish the fund, you will designate the single charity that will receive grants from the fund. 

Some benefits of establishing an SCF at TGT include the ability to time when grants are made, the ability to control the amount of the grant and the growth potential of funds held in your SCF. 

You may make a single QCD transfer to your SCF and then time (or space out) when grants are distributed from your SCF. For instance, you could create an SCF to benefit your church, direct a QCD of $120,000 to your SCF and then make $10,000 grants monthly to the church. If you desire to give incrementally, this strategy streamlines your giving because you do not need to make 12 separate QCD requests from the custodian of your IRA – but rather, just one that is directed to your SCF. You can then easily make grants from your SCF to your church in the amounts and timeframe that you determine. 

If you have determined to make incremental grants, another benefit of utilizing an SCF to receive your QCD rather than making a QCD directly to the named charity, is the growth potential for the funds held in your SCF that continue to be invested. 

When should QCDs be made?

A QCD will be effective for the tax year in which it is made. To realize the benefits of a QCD in 2025, you should plan now to identify where you intend to direct the custodian of your IRA to make your QCD. If you intend to establish a single ministry fund at TGT, please contact us to establish your fund such that it can be ready to receive your QCD before the end of 2025.

This article is not intended as legal or tax advice. Please consult your individual tax planning and tax preparation professionals to assist you with regard to your specific QCD vs RMD strategy.