What are Qualified Charitable Distributions (QCDs)?

Qualified Charitable Distributions (QCDs) have become an even more powerful tool for charitably inclined investors, thanks to their tax-efficient giving strategy. QCDs allow those aged 70½ and older to make tax-free donations directly from their IRA to a qualified charity. With the QCD limit now increased to $108,000 per person for 2025, up from $105,000 in 2024, it’s time to take a closer look at how this change could benefit both your philanthropic goals and retirement plan.

What is a Qualified Charitable Distribution (QCD)?

A Qualified Charitable Distribution (QCD) enables you to contribute directly to a qualified charity from your IRA, while potentially satisfying all or part of your Required Minimum Distributions (RMDs) for the year. In essence, QCDs allow you to transfer a portion of your retirement savings directly to a charity, bypassing income tax on the distribution. This means you can fulfill both your philanthropic objectives and meet your RMD requirements without increasing your taxable income.

Key Benefits of QCDs

• Tax Efficiency: QCDs allow you to reduce your taxable income by excluding the amount transferred directly to a charity from your reported income. This can be especially beneficial if you don’t itemize deductions.
• Meeting RMD Requirements: For individuals 73 or older who must take RMDs, a QCD can satisfy this requirement for the year without adding to your taxable income, potentially reducing your tax liability.
• Benefiting Qualified Charities: Only certain types of organizations (as defined by the tax code) qualify for QCDs, including most public charities. Be sure to verify the organization’s status to ensure your distribution will qualify.

The Inflation-Indexed QCD Limits for 2024 & 2025

Starting in 2024, the QCD limit is indexed for inflation, which means it can increase annually to keep up with the cost of living. The 2024 limit is $105,000 per person ($210,000 for a married couple), up from $100,000 per person in 2023, marking the first adjustment. This is a significant benefit for individuals who wish to make larger charitable contributions while reaping the tax advantages of a QCD. With the new indexing, your charitable giving capacity grows over time, protecting your ability to support your favorite causes and manage your tax exposure as inflation affects your financial landscape.

The 2025 QCD limit indexed for inflation is $108,000 per person ($216,000 per couple).

Eligibility and Requirements for QCDs

To utilize a QCD, you must meet specific criteria:

1. Age Requirement: You must be 70½ years old or older at the time of the distribution to make a QCD.  Note that this differs from when you must start Required Distributions – you can begin QCDs before hitting your RMD age.  QCDs can, therefore, help reduce your future RMD amount and save you taxes both the year you complete the QCD and in the future.
2. IRA Type: QCDs can only be made from traditional IRAs. Employer-sponsored plans like 401(k)s are not eligible for QCD treatment.
3. Direct Transfer: The funds must be transferred directly from your IRA to a qualified charity to count as a QCD.
4. Annual Limit: The annual limit for a QCD is now $105,000 per person and applies to the sum of all QCDs taken from all IRAs in a year. If you’re married, both you and your spouse can contribute up to this limit individually if you each have your own IRA.  Note that for any contributions you make to an IRA during a tax year, that reduces the amount of the QCD you are allowed to make by the same amount.

How to Use a QCD in Your Charitable Planning

If you plan to make a significant charitable donation, consider using a QCD. Not only will it fulfill your philanthropic goals, but it will also help you strategically manage your taxable income. This approach can be especially useful if you’re trying to reduce your Modified Adjusted Gross Income (MAGI) to avoid increased Medicare premiums or other income-related costs.

To implement a QCD:

1. Identify a Qualified Charity: Ensure your intended charity qualifies for tax-deductible contributions.
2. Contact Your IRA Custodian or Wealth Advisor: They can help facilitate a direct transfer to the charity.
3. Document Carefully: Keep records of the transfer for tax purposes. While QCDs are excluded from taxable income, they should still be reported on your tax return.

How Mission Wealth Can Help with QCDs

With the new inflation-adjusted limit, QCDs offer retirees an increased capacity for charitable giving while offering an effective way to manage taxes in retirement. Whether you’re fulfilling an RMD requirement or looking to make a meaningful impact through charitable donations, a QCD could be a valuable part of your financial strategy.

For more information on incorporating Qualified Charitable Distributions into your charitable giving or retirement plan, consult with a trusted financial advisor.

Mission Wealth can help you navigate the requirements, maximize the tax benefits, and take advantage of this unique charitable giving opportunity.