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QCDs from IRAs, but PDQ

The financial services industry has more acronyms than almost anywhere else--except possibly the military. Qualified charitable deductions (QCDs) are a little-known transaction that applies to a limited number of clients. However, the potential benefit--for the right client--can be huge. 

Under the current tax law, qualified individuals can make a transfer from their IRA directly to a charity without realizing any taxable income. To illustrate this, let’s go over some of the rules and requirements, and then outline the benefits. 

QCD Rules and Requirements 
  • Qualified individuals are IRA owners (or beneficiaries) over age 70½.  
  • They can make a direct transfer from the IRA to the charity without realizing any income from the distribution in that tax year. Keep in mind, this must be a direct transfer, not a withdrawal by the client and subsequent donation to the charity. 
  • The QCD is only available for IRAs, not qualified plans like a 401(k). If someone has a 401(k) and wishes to take advantage of a QCD, they must first directly rollover to an IRA (if eligible), then execute the QCD from the IRA. 
  • Typical QCD users are those individuals who would normally contribute to charities. If a client needs 100% of their IRA income to make ends meet, they most likely will not be making significant charitable contributions. 
  • There is a $100,000 annual cap on QCDs. 
  • Although the age to begin required minimum distributions (RMDs) has increased to 72, QCD qualification remains at 70½.  
  • For those clients who are subject to RMDs, it’s important to remember that in any calendar year, the first dollars that come out of an IRA are used to satisfy RMD requirements. 
QCD Benefits 
  • Since a QCD does not generate any taxable income for the owner, it may help to keep taxable income lower for someone who must take RMDs.  
  • Lower taxable income could keep the owner in a lower tax bracket or help maintain other benefits.  
  • Lower taxable income may also reduce or eliminate taxation on Social Security income. 
Case Study 

Let’s consider an example: 

David is 73 years old and has done well financially. He has sufficient income from his pension and Social Security but is still required to take RMDs of about $10,000 annually from his IRA. Over the past few years, these IRA distributions have been fully taxable, bumping him into a higher tax bracket. He’s active in his church and gives regularly with after-tax dollars. 

If David used the QCD rules to transfer $10,000 (or any portion thereof) early in the calendar year to his church, he would not only satisfy his RMD but would make his annual charitable contribution while realizing $0 in taxable income. 

Let’s take a simple example assuming David is in the 25% tax bracket and contributes $10,000 annually to his church. 

 Without QCDWith QCD
RMD Distribution$10,000$10,000
Taxes on distribution$2,500$0
Net for charitable donation$7,500$10,000
Additional out of pocket$2,500$0
Charitable donation$10,000$10,000
Net cost$2,500$0


In both scenarios, David took his RMD. In both scenarios, the church received $10,000. However, by using a QCD, David was able to save $2,500! 

Again, remember that the first dollars removed from an IRA in a calendar year are used to satisfy any required distribution. So, to maximize the benefit, the QCD should be executed early in the year—pretty darn quick (PDQ)--before taking any other distributions. 


Highland has numerous tax-advantage strategies for philanthropic clients. Contact your Vice President to discuss which option may be right for your clients.  


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