Changes to the tax code in recent years have created new opportunities for retirement savers:
Are you charitably minded and have a significant amount of money in a traditional individual retirement account (IRA)? If you're age 70½ or older, and don't need the money from required minimum distributions, you may benefit by giving a portion of your private wealth to charity. It’s an effective strategy that may help you even if required minimum distributions (RMDs) haven’t kicked in for you yet. You can also claim a tax deduction for making a charitable donation with funds from your IRA at any age if you meet certain conditions.
A qualified charitable distribution (QCD) is an IRS-approved giving strategy that allows seniors to make tax-free donations from your IRA. If you’re age 70½ or older you may be eligible to transfer IRA assets to charity, satisfying part or all of your RMD. A properly conducted QCD goes directly to the charity or charities you choose and counts toward your RMD, but the distribution doesn't count as income to you or generate a tax bill.
Unlike regular charitable donations, QCDs can't be claimed as itemized deductions. Even so, these gifts can deliver significant personal tax benefits by preventing the distribution from increasing your adjusted gross income (AGI). Keeping the donation out of your AGI may be important because doing so can:
Importantly, charitable contributions don't yield a tax benefit unless you itemize deductions on your tax return, and fewer people itemize these days because of the larger standard deduction. But QCDs are available to all eligible taxpayers, including those who claim the standard deduction. If you’re age 70½ or older and are receiving RMDs from IRAs, you may gain a tax advantage by making annual charitable contributions via a QCD from an IRA. This charitable contribution will reduce RMDs by a commensurate amount, and the amount of the reduction will be tax-free.
In addition, making a QCD lowers your IRA balance, which may reduce the amount of your RMD in subsequent years. You can make a QCD beginning at age 70½, although RMDs don’t kick in until age 73 thanks to the SECURE Act 2.0.
Besides age limits, QCDs carry specific requirements in order to qualify for the tax benefits that accompany this type of distribution. One of the most critical rules to understand is the requirement that the distribution go directly from your IRA to a qualified charity. If the money comes to you first, no matter how briefly, the IRS will not consider your donation as a QCD.
Other rules for QCDs relate to:
There's a $108,000 limit on total QCDs for an individual in 2025 — a limit that is now inflation-indexed and will likely increase each year. Married couples filing jointly may be able to make QCDs up to a combined total of twice the annual limit. If you and your spouse both have IRAs set up in your respective names and are both eligible to make a QCD, each of you is entitled to make a separate $108,000 QCD in 2025.
IRA holders age 70½ or older have a one-time opportunity to fund certain types of gifts using a QCD in 2025. For this year only, you have the option to use up to $54,000 from your IRA to establish a Charitable Remainder Trust or a Charitable Gift Annuity.
Any amount you put toward these specialized QCDs counts toward the 2025 per-person annual limit of $108,000. As with any other QCD, distributions that fund a charitable remainder trust (CRT) or charitable gift annuity (CGA) this year will count toward your 2025 RMD and will not contribute to your AGI. However, future payments you or your spouse receive from the CRTs or CGAs you establish this year will be taxed as ordinary income.
An IRA charitable deduction is a misnomer, since the IRS does not recognize this term or provide tax benefits related to it. People sometimes describe tax deductions of money withdrawn from an IRA this way, but it’s important to distinguish normal charitable donations (even those made using funds from an IRA) and their associated tax deductions from QCDs.
Traditional IRA distributions are taxable either wholly or partially depending on whether you've made any nondeductible contributions over the years. These distributions are taxable even if you choose to donate the funds to a charitable organization.
While your chosen charity will no doubt be grateful for the donation, the IRS does not afford them any special treatment or tax benefits. They are tax deductible only if they meet the rules for any other type of charitable donation, and the distribution from your IRA is taxed as it normally would be.
There are times, however, when making a charitable donation with some of the funds from your IRA distribution can be part of a smart tax strategy that could potentially save thousands of dollars in tax liability over your lifetime. To capture these benefits, you’ll want to time your gift to coincide with a Roth IRA conversion — ideally during a market dip that has significantly reduced the value of your traditional IRA. Under these conditions, you could wind up owing little or no tax on your Roth conversion.
Making charitable contributions can allow you to claim a tax deduction, subject to certain limitations, but only if you itemize deductions on your tax return rather than claiming the standard deduction.
For those who itemize, the limit that applies to a contribution typically depends on the type of property you give and which category of qualified organization you give it to. Also, the amount of the contribution you can deduct generally is limited to a percentage of your adjusted gross income (AGI). Generally speaking:
Contributions that exceed the limitation percentage in the year of the gift may be carried over for five succeeding taxable years. You must obtain documentation of your gift from the receiving organization for noncash gifts. If your gift is valued at more than $500, you must file Form 8283. For noncash gifts worth more than $5,000, the IRS requires you to have a qualified appraisal documenting the value of the items you’re donating.
Beginning in 2026, charitable deductions are limited to gifts that exceed 0.5% of your AGI and deductions for donors with high incomes are capped at 35%.
When you convert funds in a traditional IRA to a Roth IRA, you’re essentially taking pretax money and paying the taxes on it immediately. Once you’ve paid the tax and the assets are in a Roth IRA, you won’t be taxed on future distributions, including dividends, capital growth and interest.
A Roth conversion typically generates significant tax liability in the year of the conversion. You can minimize your tax exposure by strategically timing your conversion to align with market pullbacks and compressing your charitable donations for several years into the same tax year you make the conversion. Here’s how it might look in practice.
Assume you have a traditional IRA that has dropped in value because of market fluctuations, going from $1 million to $500,000 (obviously this is an extreme example). You typically make charitable contributions of around $25,000 a year. If you converted your traditional IRA of $500,000 to a Roth IRA, it would cost you approximately $185,000 in additional tax on the conversion. If you also simultaneously increased your annual charitable contributions by $100,000, it would cost you approximately $157,000 in tax to convert the traditional IRA to a Roth IRA.
Some of the income tax generated on the IRA conversion is offset by the deduction obtained from the increase in the charitable contributions. When the Roth IRA bounces back in market value, all the appreciation is now tax-free as well as all future earnings.
You can take the same approach when converting only a portion of your traditional IRA to a Roth IRA. If you convert $100,000 of your IRA to a Roth IRA while simultaneously increasing your charitable contributions by $100,000, there would be no additional tax to pay on the IRA conversion. Although this example is extreme, it demonstrates the power of the combination of two strategies to save in overall income tax in the long run.
Don’t let taxes take too big a bite out of your hard-earned retirement savings. The QCD strategy can be a smart tax move for high-net-worth individuals over 70½ years old, and taxpayers of any age can benefit from a strategically executed Roth conversion. Our expert tax consultants can help you design and implement a tax-smart strategy that minimizes taxes owed on your IRA funds, including RMDs.
Get a free one-on-one consultation to assess your needs and next steps to help you reach your strategic tax goals.
