An IRA Strategy That Lowers Your Tax Bill

Key Takeaways

• QCDs allow charitably inclined IRA owners who are 70½ years old or older to donate directly from a traditional IRA without including the distribution in taxable income
• Traditional IRAs are the best assets to give to charity
• Doing a QCD before taking an RMD can satisfy the distribution requirement

Christine Benz: Hi, I’m Christine Benz from Morningstar, and thanks for joining us for the final installment of this limited-edition series, Your Tax Playbook for Retirement, with Ed Slott. Today, Ed and I will be discussing one of his favorite retirement tax strategies, the qualified charitable distribution. Ed, thank you so much for being here.

Ed Slott: All right, great to be back.

How Qualified Charitable Distributions Work

Benz: It’s great to have you. We want to discuss what’s called a qualified charitable distribution. It’s something that you are a big fan of.

Slott: Yes.

Benz: Talk about the QCD and who can use it.

Slott: It’s one of the best provisions in the tax code, other than my favorite, Roth IRA, which nothing tops because it’s tax-free for everybody. But if you give to charity, and that’s what I want to start with, if you’re charitably inclined, I always say for people who give to charity anyway, because over the years, lots of people went through all these shenanigans and things to save money, but they didn’t really want to give to charity. And when they found out they actually had to give the money away, said, “Well, I didn’t sign up for that.” So, you have to be charitably inclined. If you’re giving money away to charity, which is great, do it this way.

Qualified charitable distributions allow IRA owners only—not 401(k)s—to transfer if they’re 70½ years old or older. I know the RMD age is now 73, but the QCD age did not change. It’s still 70½. You can actually do them even before RMDs kick in to bring down your IRA balance at zero tax. So you can transfer from your IRA—a direct transfer—to a qualified charity, and it’s excluded from your income.

Normally, if you took a distribution from your IRA, it would be included in income. And if you wanted to give to charity, you could do it maybe as an itemized deduction. But for years, people didn’t take itemized deductions because of the SALT cap, but a lot of that has gone now to the OBBBA rule for especially high-tax states, where it’s now a much higher threshold: not $10,000 of state and local taxes, but $40,000. More people can itemize. But even if you can itemize, it’s still better reducing adjusted gross income, the key number on the tax return that determines your Medicare IRMAA charges, the 3.8% tax on net investment income, taxation on Social Security. It’s an exclusion from income. It will always save you money if you’re charitably inclined.

And here’s the good thing. The Secure Act made IRAs, when they did away with the stretch IRA, which we talked about for years, and replaced it with a 10-year rule, it made IRAs probably the worst asset for wealth transfer or estate planning. But IRAs are good for something. They’re the best assets to give to charity. Why? Because give them the taxable stuff, give them the dregs. The charity doesn’t pay any tax. They don’t care what kind of money it is. Give them the IRAs and save the rest of your money, the non-IRAs, for your beneficiaries that get step-up in basis, which you don’t get with IRAs. IRAs are the best assets, hands down, to give to charity. And this provision, the QCD, allows you to do it. And in 2026, you can give up to $111,000 a year, not per IRA, per IRA owner.

Which Retirement Accounts Should Be Used for QCDs?

Benz: OK. So, just to clarify, Ed, this would be for traditional IRA assets only, right? I’m not going to be able to do it with a 401(k), even a traditional tax-deferred 401(k), and a Roth IRA would automatically not be a good idea in this context either.

Slott: No, no. You never give away money you already paid tax on. That’s the beauty of using the traditional IRA. Never do it with a Roth IRA.

How to Use a QCD to Satisfy Your RMD

Benz: Last question for you, Ed, is wondering if you can walk us through: How do I make sure that my QCD counts toward my tax bill and also helps fulfill my required minimum distribution? What are the steps to follow, and what documentation do I need? Because I think there’s been a lot of confusion about how to make sure that this is all accounted for properly. What steps should people take?

Slott: Well, you will be relying on the financial institution to code it properly on the 1099. There have been some issues with that, but they’re not the police. If you say you’re giving to a qualified charity, they believe you. That’s up to the IRS. So, they’ll give you a 1099 and show a QCD. But the ordering, especially when you’re in RMD territory—and that’s where QCDs really shine—because let’s say you have an RMD of $10,000 and you want to, just for example, and you want to also give $10,000 to a certain charity, and you’re 70½ or over, you can transfer from your IRA, $10,000 to the charity.

Now, you don’t even have to take the RMD. It’s automatically satisfied. Just make sure you did the QCD first. If you did the RMD first, it doesn’t work out that way because once you take an RMD, that can’t be undone. So, you do the QCD first, but that satisfies an RMD. Normally, an RMD would add income to your adjusted gross income, taxable ordinary income. The QCD takes that right off the table. In essence, you’re getting an IRA distribution out at a 0% tax rate. Yes, you’re giving the money away, but you are going to give that money away anyway in a less efficient manner.

Benz: OK, Ed. Thank you so much for your perspective, as always.

Slott: All right. Great, Christine. Thanks.

Benz: Check out all the videos in this series on taxes and retirement at the link below. Thanks for watching. I’m Christine Benz from Morningstar.