The end of the year marks the time when many people are doing two things simultaneously.

First, they are deciding how much—or how much more—they can afford to give to their favorite charities before year-end. Second, they are ensuring that they have taken any remaining required minimum distributions, commonly called RMDs, and maybe thinking through how to limit the associated income tax burden.

For some, utilizing the qualified charitable distribution, or QCD, for the RMD might be the solution.

An RMD is the federally mandated minimum amount a person must withdraw from their individual retirement account every year after age 73. The requirement for withdrawal applies to other pretax retirement plans as well, including 401(k)s, 403(b)s, and 457(b)s. For purposes of simplicity, I will use the term “IRA.”

Because the money going into an IRA hasn’t yet been taxed, when it comes out of the IRA, the owner must pay ordinary income tax on the amount withdrawn. Accordingly, some folks who need to take RMDs before the end of the calendar year bristle at the prospect of paying ordinary income tax on the withdrawal.

Some even wish they didn’t need to withdraw anything from the IRA so they could avoid pushing their income and associated marginal income tax rate higher. Regrettably, the law doesn’t allow the money to stay in the IRA without incurring a burdensome penalty. But the law does allow an opportunity for an individual to take the money out and give it directly to a charity through a QCD without increasing their income and associated marginal income tax rate.

QCDs

A QCD, which once again is short for a qualified charitable distribution, allows a direct transfer from your IRA to a charitable organization of up to $105,000 for 2024. Though people who transfer a QCD to a charity aren’t allowed to take a charitable deduction on their income taxes, they get something that is likely more powerful: the exclusion of the QCD amount from ordinary income and an offset against any RMD requirement.

This type of distribution has several benefits. First, it can keep the donor from entering a higher tax bracket and subjecting a higher percentage of their earnings to taxes. Second, it can also prevent certain tax phaseouts that apply as taxpayers report higher income.

Though RMDs are required of a variety of pretax accounts as listed above, QCDs aren’t available to the same accounts. Generally, a QCD is not available to employer-sponsored accounts such as 401(k)s, 403(b)s, or 457(b)s.

Coordinated QCDs, RMDs

If you have an employer sponsored plan that is not eligible for the QCD, an easy approach is to roll that plan into an eligible IRA. The assets would maintain their status as pretax qualified retirement monies but are housed in an IRA allowing qualification for the QCD. As an additional bonus, an IRA often offers expanded investment options beyond that offered by employer-sponsored plans.

When deciding to do a QCD, pay attention to any amount already withdrawn throughout the calendar year to satisfy RMDs, as this money cannot be offset by a later QCD. In other words, QCDs should be considered before any portion of an RMD is withdrawn.

A QCD need not be tied directly to an RMD amount, but it can offset any RMD. For example, if the RMD is $10,000, then a QCD for $10,000 would satisfy the RMD for the year. A QCD for $5,000 would offset the RMD such that the account owner would need to withdraw and recognize as income the remaining $5,000 of the $10,000 RMD amount.

Charitable trusts

In addition to distributions to charities, a QCD of up to $53,000 for 2024 can be directed one time to so-called “split interest” trusts like a charitable remainder trust or a charitable gift annuity. Given the relatively modest amount allowed to go to a split-interest trust—and the fact that it can’t be commingled with other non-QCD assets—and the cost associated with establishing a charitable remainder trust, a charitable gift annuity likely will make the most sense for folks interested in this option who want to make a contribution to a charity but also value the security of a continuing income stream for life.

If you count yourself in the group of people looking at RMDs and charitable giving, consider the QCD. Talk to your legal and tax professionals to see if it’s the best option for you.

Beau Ruff is an attorney and director of planning at Cornerstone Wealth Strategies Inc., in Kennewick, Washington.