What Is a Qualified Charitable Distribution (QCD)?
A qualified charitable distribution (QCD) is a distribution from your individual retirement account (IRA) to a qualified charity. You must be age 70½ or older to make a qualified charitable distribution. A qualified charitable distribution is not taxed, nor is it included in your taxable income.
If certain conditions are met, QCDs also can count toward the required minimum distributions (RMDs) that people who are age 73 or older must meet each year if they have traditional IRAs (or a number of other tax-advantaged retirement plans that you can’t use for a QCD). Also important: You don’t have to itemize on your tax return to take advantage of a QCD.
- A qualified charitable distribution (QCD) is a tax-free donation from your individual retirement account (IRA) to a qualified charity.
- You must be age 70½ or older to make a qualified charitable distribution.
- A qualified charitable distribution is not included in your taxable income.
- You can’t deduct a QCD from your taxes, but the savings on your income may still make this kind of donation a tax-savvy move.
- A qualified charitable distribution counts toward your required minimum distributions (RMDs).
How a Qualified Charitable Distribution (QCD) Works
Anyone age 70½ or older can opt to take money from their IRA and donate it to a qualified charity. Qualified charitable distributions can be made from a traditional IRA or a Roth IRA, but there’s no tax benefit to making a QCD from a Roth IRA because distributions are already tax free. You can also take QCDs from Active Simplified Employee Pension Plan (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, if they are not ongoing SEP or SIMPLE plans (meaning that no contribution has been added to the plan in the year when the QCD is taken). You cannot take QCDs from 401(k)s, however.
Not every charity qualifies for a qualified charitable distribution. Check with a tax professional beforehand to make sure that the organization you plan to gift qualifies for QCDs.
Qualified charitable distributions can help reduce your federal tax bill in two ways.
Lower Taxable Income
While a QCD is a withdrawal from your IRA, it is not counted as taxable income on your tax return like regular withdrawals are. Instead, a QCD can be deducted from your gross income on your tax return—without having to itemize your deductions. This both lowers your income and means that you can take the standard deduction instead of itemizing if you prefer.
The standard deduction is a specific amount you can use to reduce your taxable income. For 2022, single filers get a $12,950 standard deduction; it’s $25,900 for married couples filing jointly. (In 2023, those numbers rise to $13,850 for single taxpayers and $27,700 for married filing jointly.)
Reduction in Required Minimum Distributions (RMDs)
Another benefit of taking qualified charitable distributions is that they count toward your annual required minimum distribution (RMD)—the minimum amount that you must withdraw from many IRAs (except Roth IRAs) each year. RMDs start when you reach age 73, starting in tax year 2023, as determined by the SECURE 2.0 Act of 2022. Previously, the RMD age was 72.
The problem with taking RMDs from traditional IRAs (and 401(k)s as well) is that they increase your taxable income. Depending on your situation, they can push you into a higher tax bracket. Using qualified charitable distributions could fulfill all or part of your RMD requirement without increasing your taxable income. The maximum annual amount that you can take as QCDs is $100,000. (Note that 401(k)s and other qualified plans also have RMD requirements, but you cannot take a QCD from those savings vehicles.)
Don’t forget to check your state: While a QCD is not subject to withholding on your federal income tax return, state tax rules may differ. Ask a tax professional or your state income tax office for specifics on QCDs in your state.
It’s important to verify that the charitable organization to which you want to donate is an Internal Revenue Service (IRS)-approved charity. The IRS has an Online Search Tool that can help.
Pros and Cons of a Qualified Charitable Distribution (QCD)
A qualified charitable distribution can be a great tool in managing your retirement assets, but there are some drawbacks as well.
It could reduce your adjusted gross income and, thus, lower your tax bracket and how much you pay in taxes.
You can avoid the 25% penalty that is imposed if you don’t take your required minimum distribution (RMD).
You don’t have to itemize deductions on your tax return to deduct a QCD from your taxable income.
The donation must go to a qualified charity.
The donation must come directly from the individual retirement account (IRA) through your trustee to the charity; you cannot withdraw the funds and make the donation directly.
The maximum annual QCD limit is $100,000.
A QCD cannot be claimed as an itemized charitable deduction on your taxes.
What is the Benefit of a Qualified Charitable Distribution (QCD)?
A QCD could reduce your adjusted gross income, meaning that you could pay less in income taxes.
Is a QCD an Itemized Deduction?
No, you don’t have to itemize deductions to deduct a QCD.
How Much Can I Donate Through a QCD?
The maximum annual limit for QCDs is $100,000.
Do All Charitable Organizations Qualify To Receive a QCD?
No. The charity must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. Private foundations, for instance, are not eligible for QCDs. Before making any QCD, check with a tax professional or the Internal Revenue Service (IRS) to see if the charity is IRS-approved.
The Bottom Line
The qualified charitable distribution (QCD) is an important tool that lets donors age 70½ or older help charities of their choice and reduce their tax burden in two ways: lower their taxable income and reduce the required minimum distributions (RMDs) that can increase their income. It’s worth learning how QCDs work to take maximum advantage of their benefits to individuals and to the wider world.