What are QCD’s and RMD’s and how do they impact you?
It was estimated that in 2024 Americans held $9.3 trillion in 401k accounts. It is estimated that approximately $8 trillion of that is in pre-tax accounts1. That is a significant amount of money that will eventually need to be taxed… or perhaps not. At retirement, many people choose to move that money into a pre-tax IRA. This is where Required Minimum Distributions (RMDs) come into play. People invested in a pre-tax or traditional IRA will be required to take distributions once they reach a certain age. Individuals born between 1951 and 1959 generally must begin taking RMDs at age 73. Those born in 1960 or after will begin at age 75. The RMDs must be taken, even if you have planned well and don’t necessarily need the money. These distributions are generally taxable as ordinary income and may affect both your income tax liability and the amount you pay for Medicare premiums. While RMDs cannot be avoided, strategies may help reduce their tax impact.
There are no options to avoid taking a distribution; however, there is a way to reduce the impact on your income. This is where QCD’s or Qualified Charitable Distributions can help. Once you reach age 70½, you may be eligible to make a Qualified Charitable Distribution (QCD) from your IRA. A QCD can satisfy all or a portion of your RMD requirement while excluding the distributed amount from your taxable income. The recipient must be a qualified 501(c) (3) charitable organization. The funds must be directly transferred from your IRA to the charitable organization. If the money passes through you first, then it does not qualify. The limit is $111,000 per individual. Married couples can each donate $111,000. It is important to note that money must go directly to the charity; this is a key aspect of a QCD.
The last item to consider is the timing of any RMD’s and QCD’s. If you do not need the full RMD amount, it is generally beneficial to complete any planned QCDs before taking your RMD distributions. Below is an example:
- Your RMD is $10,000
- You make a QCD early in the year equal to $5,000
- You're remaining RMD is $5,000 and you report $5,000 in taxable income
The sequence of the distributions is very important. This is even more important if you take the full RMD prior to making donations to a charity. Please see the following example:
- Your RMD is $10,000
- You take the full amount of $10,000
- You then decide to make a charitable gift of $5,000
- Because the RMD was already fully satisfied, the entire $10,000 distribution remains taxable income. While the charitable gift may still qualify for charitable tax treatment depending on your circumstances, it no longer reduces your RMD-related taxable income.
For retirees who are charitably inclined, Qualified Charitable Distributions can be a powerful planning tool. A properly executed QCD allows you to support organizations that are important to you while potentially reducing taxable income and limiting the impact of RMDs on your overall tax situation.
As with many retirement planning strategies, timing matters. Completing QCDs before taking your RMD can help maximize the potential tax benefits. Because tax laws and individual circumstances vary, it is important to consult with your financial professional and tax advisor before implementing any strategy.
A little planning today may help you keep more of your retirement assets working for you while supporting causes you care about.
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The charity must receive and process your contribution before 12/31/XXXX. If the charity does not cash the check and complete processing by that date, the gift may not qualify as a QCD. If you were relying on the QCD to satisfy your RMD, you may not meet your RMD requirement for the year.
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