Year-End RMDs and the QCD Workaround Strategy

by Prof. Robert Bloink and Prof. William H. Byrnes

Once again, the end of the year is upon us—and many clients may be searching for required minimum distribution (RMD) strategies that can help them avoid a tax hit for 2024. The qualified charitable distribution (QCD) strategy is one that tends to come up each year. It’s also a strategy that seems to generate questions and confusion. Taxpayers who are interested in furthering their charitable goals for the year can kill two birds with one stone by using the tax friendly QCD strategy. The rules are relatively detailed, so taxpayers should ensure they understand the basics to avoid generating a surprise tax hit for the year.

QCD Giving: The Basics

Under the rules governing QCDs, charitably minded clients can direct up to $105,000 in IRA funds (in 2024, increasing to $108,000 in 2025) to charity. The $105,000 donation is not included in the taxpayer’s income and, if conditions are satisfied, the donation counts toward the taxpayer’s annual RMD. The cap is a per-person cap, so that married taxpayers can direct up to $210,000 to charity in 2024 so long as each spouse has their own IRA.

If a client must have reached age 70.5 to execute a QCD (the QCD eligibility age was not raised along with the required beginning date age). In these cases, the transfer is made directly (via a trustee-to-trustee transfer) from the client's IRA to a qualified charity (generally, 501(c)(3) organizations, but not donor-advised funds, foundations or charitable gift annuities).

The distribution will count toward the client's RMD yet is entirely nontaxable (thus also allowing the taxpayer to reduce their taxable income for the year). Beneficiaries of inherited IRAs who are over age 70.5 are also permitted to make QCDs, so long as the beneficiary also meets all other basic requirements for the transaction.

QCDs can only be made from a traditional IRA or an inherited IRA. Tax-preferred accounts such as 401(k)s, SIMPLE IRAs, SEP IRAs and Roth IRAs generally do not qualify, although QCDs can be made from SEP IRAs and SIMPLE IRAs that are not “ongoing”. To be ongoing, an employer must have made a contribution to the SEP or SIMPLE IRA for the plan year when the QCD would be made.

While the current required beginning date for RMDs is age 73, taxpayers remain eligible to execute a QCD starting at age 70.5.

Under the SECURE Act 2.0, taxpayers are now allowed to make a one-time qualified charitable distribution of up to $50,000 from an IRA to a charitable remainder trust (CRT) or charitable gift annuity (CGA). As with the traditional QCD option, the distribution will count toward the taxpayer’s annual RMD obligation without generating any tax liability.

The income payments of 5% or greater from the CRT or CGA to the donor (or spouse) must begin within one year of the date the vehicle is funded—and those payments are taxed as ordinary income when received. Only the donor and the donor’s spouse (or both) can receive the income from the split-interest vehicle. Often, the payment amounts are determined based on rates provided by the American Council on Gift Annuities. These payments can continue for a predetermined period of time or for a person’s lifetime and, after the payments cease, the remainder passes to the qualified charity.

QCD Areas of Confusion

For clients that have reached their required beginning date (currently 73), the first dollars out rule can generate confusion over the QCD option. Confusion also exists in situations where clients both take a portion of their RMD in cash and use the QCD strategy to satisfy the remaining withdrawal requirement. Clients should be advised that the first funds they withdraw from an IRA each year always count toward their RMDs.

Once the required distribution has already been taken, the taxpayer is not permitted to execute a QCD later in the year to offset that distribution. Because QCDs do count toward the RMD, it’s advisable to execute a QCD earlier to avoid any mix-ups. The problem often arises when a taxpayer takes a distribution to cover expenses and later decides to do a QCD. The amount withdrawn before the QCD is executed will be taxable regardless of whether the taxpayer’s QCD would have offset the amount initially withdrawn.

It’s also important to note that the QCD amount is not limited to the client’s RMD amount for the year. Clients can use the QCD to donate much more than their RMD amount (so long as the entire QCD amount does not exceed the $105,000 threshold for 2024).

Conclusion

The QCD strategy can provide a valuable solution for charitably-minded clients who are interested in reducing the tax liability that would otherwise be generated by taking annual RMDs. Of course, advisors should carefully evaluate the client’s situation and goals when evaluating the benefits of a QCD.