When it comes to retirement, every dollar counts. That’s why savvy retirees are turning to a little-known tax loophole to keep more money in their pockets. It’s called the Qualified Charitable Distribution (QCD), and it’s a game-changer for anyone over 70½ who wants to save on taxes while supporting their favorite charities. Here’s how it works—and why it’s worth considering.
A QCD allows you to donate up to $100,000 directly from your IRA to a qualified charity. The best part? This donation counts toward your Required Minimum Distribution (RMD), but it’s not included in your taxable income. That means you can satisfy your RMD without increasing your tax bill. This is a win-win for retirees who don’t need the full amount of their RMD: you support a cause you care about while reducing your taxable income.
Let’s break it down with an example. Say your RMD is 20,000, and you donate 10,000 to a charity through a QCD. Instead of paying taxes on the full 20,000, you’ll only pay taxes for a sum of 10,000. Depending on your tax bracket, this could save you thousands of dollars. Plus, you’re making a meaningful contribution to a charity that aligns with your values.
But there’s a catch: not all charities qualify for QCDs. The donation must go directly to a 501(c)(3) organization, and you can’t receive any goods or services in return. Private foundations, donor-advised funds, and supporting organizations are also excluded. So, it’s important to do your homework before donating.
Another benefit of QCDs is that they can help you avoid the Medicare Income-Related Monthly Adjustment Amount (IRMAA) according to HBKS Wealth Advisors. This surcharge applies to higher-income retirees, and reducing your taxable income through a QCD could keep you below the threshold. For many retirees, this means lower Medicare premiums and more savings.
To take advantage of a QCD, you must contact your IRA custodian and request a direct transfer to the charity, according to Fidelity Investments. Make sure to get a receipt for your records, as you’ll need it for tax purposes. It’s also a good idea to consult with a tax professional to ensure you’re maximizing the benefits.
While QCDs are a powerful tool, they’re not the only way retirees can save on taxes. Other strategies, like Roth conversions and strategic withdrawals, can also help reduce your tax burden. The key is to plan ahead and explore all your options.
For retirees who are charitably inclined, QCDs offer a unique opportunity to give back while keeping more of their hard-earned money. It’s a simple yet effective way to make a difference—both for yourself and for the causes you care about.
So, if you’re looking for a way to save on taxes and support your favorite charities, consider a Qualified Charitable Distribution. It’s a surprising loophole that could save you thousands—and make your retirement even more rewarding.
