Americans are a generous bunch. Among the world economies, no country gives more than the United States. It’s not even close.

Charitable giving helps fulfill a deep sense of purpose among many donors. Be it giving to a church, a local food pantry, or an arts organization; these organizations carry significance to many Americans. In this light, not only does it not feel like giving money away when charitably donating, it can actually feel like a reward to the donor!

But giving doesn’t have to be strictly about helping others. It can lower your taxes as well. In this post I’ll share the basics of a gifting strategy many charitably-inclined retirees can use right away–the Qualified Charitable Distribution.

How Qualified Charitable Distributions (QCDs) Work

A QCD is fairly straightforward. It involves directing funds from an eligible IRA, like a Traditional or Rollover IRA, and directing those funds to an eligible charity of your choice. When funds are sent in this manner, the QCD amount is excluded from taxable income. This tax avoidance is a major benefit of QCDs, particularly for those who are charitably inclined. QCDs can begin as early as age 70 ½.

Example: John and Mary are retired and have regularly given $10,000 for tithing to their church each year. To help with this, they have regularly withdrawn funds from John’s Traditional IRA and put them into his checking account, resulting in $1,200 of taxes owed. John recently reached age 70½. John is now eligible to make QCDs, allowing him to send the funds directly to his church, and avoiding the tax bill. If we assume John and Mary are in the 12% tax rate, this lowers their $1,200 tax bill to zero!

This example not only illustrates the basic mechanics of QCDs, but it underscores an important point. Many of the retirees we work with at Hale Financial are charitably inclined, but because they weren’t yet eligible to make QCDs because of their retirement age (say, age 65), they got in the habit of pulling the funds into their account, paying the taxes, and then donating. However, once the 70 ½ threshold is crossed, big tax savings are available through the QCD option!

Fulfilling RMDs and Reducing Social Security Taxes Using QCDs

There are a few additional bonuses QCDs present. First, they can help satisfy Required Minimum Distributions. RMDs are mandatory withdrawals that need to happen from tax-deferred IRA accounts once you reach a certain age–typically between age 73 to 75. These are taxable withdrawals, unless they’re directed to a charity via a QCD.

QCDs are also eligible through Inherited IRAs. These IRA accounts can be particularly pesky, since the total account balance generally must be withdrawn after 10 years (unless they’re inherited from a spouse). This can lead to a large tax bill at the end of the 10-year mark. Instead, the charitably-inclined recipient of an Inherited IRA can develop a giving schedule over time to help “deplete” the Inherited IRA over time. Keep in mind they still must be over age 70 ½.

Finally, QCDs can potentially lower other taxes as well. For example, taxes paid on Social Security can vary depending on your total income. When taxed fully, 85% of your Social Security benefit is counted toward taxable income. But if your income is lower, for instance due to a QCD, this may not only eliminate the taxes owed on your distribution, but lower the taxes owed on your Social Security as well.

Example: Like our earlier example, Greg and Pam like to give $10,000 to various charities each year. They take $30,000 each year from their IRA, and also receive $30,000 in pension benefits along with $39,000 in Social Security benefits. They give to these charities using cash. Based on their current income, 85% of their Social Security benefit is taxed. Their total income results in $5,020 of taxes owed. If they instead donate $10,000 directly from their IRA through a QCD, their taxable Social Security is reduced, resulting in a $3,144 of taxes owed. A nearly $2,000 (or 40%) tax reduction!

Greg and Pam’s $10,000 withdrawal sent directly to their desired charities reduced their income taxes by $1,200, but it also reduced their taxes further by lowering the amount of taxable Social Security. That’s what you call killing two [tax] birds with one stone!

In summary, QCDs offer a powerful way for retirees to support the causes they care about while maximizing tax savings. By reducing taxable income, helping fulfill Required Minimum Distributions, and potentially lowering taxes on Social Security, QCDs turn everyday generosity into a smart financial strategy.