Give smarter with your required distribution

If you hold a traditional IRA, you generally must start taking distributions at age 73. These are known as required minimum distributions, or RMDs. The amount you must withdraw each year is based on your age and your account’s value at the end of the previous year.

But what if you don’t need your RMD income for your daily expenses? You’re still required to take it — and with a traditional IRA, it’s taxable in the year of the distribution.

Gifting your required minimum distribution

If you’re interested in supporting a charity and potentially lowering your tax bill, one strategy to consider is a qualified charitable distribution, or QCD (which you can begin at age 70½). With a QCD, your RMD is transferred directly from your IRA to your chosen charity.

Why consider a qualified charitable distribution?

Beyond the charitable benefits of a QCD, as the donor, you can benefit from this strategy in three ways:

1. Reduced tax liability — Each year, the amount of your RMD is added to your adjusted gross income (AGI), which may translate into a higher tax bill. A QCD, on the other hand, won’t increase your AGI because the money is transferred directly to the charity.
   Also, keep in mind that a QCD can satisfy your RMD but isn’t limited to that dollar amount. You can exclude up to $105,000 in 2024 (indexed annually) of QCDs from your taxable income per taxpayer per year. And you can use a QCD regardless of whether you itemize your income taxes.
2. Reduced taxes on your Social Security benefit — Whether and how much your Social Security income is taxed depends on your overall income and filing status. A QCD helps lower your AGI — this, in turn, can reduce the amount of tax you may need to pay on your Social Security benefits.
3. Reduced Medicare premiums — Your Medicare premiums are based on your income. When you use a QCD, your RMD isn’t added to your income. A lower AGI can potentially reduce these premiums. Not everyone is subject to these premiums, however, so you’ll want to discuss it with your tax professional.

What else should you know about QCDs?

There are other considerations with this strategy:

• If you make deductible contributions to your IRA during or after the year in which you reach age 70½, it will result in a dollar-for-dollar reduction in the tax deductibility of future QCDs.
• An employer-sponsored retirement account, such as a 401(k), doesn’t qualify for a QCD. But you can roll your RMD funds from a 401(k) into an IRA, which would make them eligible for the strategy. You’ll want to discuss this with your tax professional, but as a rule of thumb, a rollover could be beneficial if your alternative is to take a distribution from your 401(k) and then donate it.
• Roth IRAs generally result in tax-free withdrawals. Because of this, giving from a Roth IRA is less beneficial.

Not everyone qualifies to use the QCD strategy, so you’ll want to talk with your tax professional and financial advisor before deciding on it. If you’re eligible to use a QCD, your financial advisor can work with your tax professional to help you put your money to work for your favorite charity.

Gifting through a donor-advised fund

If you’re looking for a more permanent gifting solution, a donor-advised fund, or DAF, might meet your needs. A DAF is set up specifically for charitable giving. As the donor, you make an irrevocable contribution to the fund and receive an immediate tax deduction.

A DAF can be a simple and convenient way to maximize your charitable giving while receiving an up-front tax deduction. But DAFs can come with higher contributions, which may not fit your circumstances. And you cannot use a QCD to fund your DAF.

Your financial advisor can review your entire financial picture and outline the benefits and trade-offs of a DAF for you.