The benefits of donating your IRA RMD early in the year

If you’re charitably inclined and over age 70½, consider a qualified charitable distribution, or QCD. This opportunity allows each IRA owner age 70½ or older to transfer up to $100,000 directly to charity each year. If you’re older than 73, the QCD can count as some or all of your annual required minimum distribution (RMD), and the QCD amount won’t count toward that year’s adjusted gross income.

The QCD is a particularly smart gift for those who take the standard deduction and would miss out on writing off charitable contributions, but even itemizers can benefit from a QCD. Because the QCD’s taxable amount is zero, the move can help any taxpayer mitigate tax on Social Security or surcharges on Medicare premiums.

For example, let’s say your RMD is $25,000. You could transfer the whole $25,000 to charity and satisfy your RMD while adding $0 to your adjusted gross income. Or you could gift a nontaxable QCD of $15,000 to a charity and then take a taxable $10,000 distribution to satisfy your RMD.

One rule many people aren’t aware of is the “First Dollars Out” rule. The first dollars out of an IRA each year are considered to be the RMD until that amount is met. So, if you want to gift a QCD of $15,000 that will count toward a $25,000 RMD, be sure to place the order for the QCD before taking your full RMD out if you want to maximize your tax benefits for this type of charitable gift.

Another great reason to gift your QCD early in the year is that a QCD must be fully cashed by the charity and have fully cleared out of your IRA before December 31 in order to count in that year. The early bird gets the QCD, it turns out!

NEW! The "legacy IRA"

In December 2022, Congress expanded the definition of QCDs. Now, people over 70½ can now make a one-time $50,000 QCD from an IRA to a charitable gift annuity or charitable remainder trust. If you're age 73 and older, you can count this and other QCDs toward your required minimum distribution. Read all about it here.