ARTICLE

Can a QCD donation make
your RMD taxes disappear?

Ok, it’s math and not magic, but no less impressive.

That jumble of letters adds up to be a great way for donors to support their favorite nonprofit organization and possibly get an extra tax break. You or someone you know may be able to reduce federal income taxes by making a charitable gift through an IRA Qualified Charitable Distribution (QCD). And the QCD can count toward an annual retirement account Required Minimum Distribution (RMD).

Here's how it works.

If you are 70½ years old or older, you may be able to use a QCD to transfer funds directly from your IRA to an eligible qualified charity as a donation. And if you are required to take an RMD for the year—a mandatory withdrawal from your IRA—the QCD can be considered part of that RMD and that donated amount is not counted as taxable income.

For example, if a person is required to take a $10,000 RMD and gives $2,000 from an IRA to an eligible charity through a QCD, that $2,000 counts toward the RMD amount and is not taxed. Only the remaining $8,000 would generally be the taxable portion. In some cases, you might be able to cover your entire RMD. Further, the reduction in taxable income may also help reduce the impact on Medicare premiums or taxes on Social Security benefits.

Many but not all common IRA account types currently qualify for a QCD, while other retirement accounts such as 401(k) and 403(b) accounts, currently do not. Because everyone’s situation is different, and QCD rules, annual limits, and RMD requirements can change, donors should consult a tax advisor, financial advisor, or their financial institution to see if this approach is a fit.