A Prudent Stewardship Tactic: the IRA-QCD. A strategic tax and donation tool.

I recently met with a longtime client who has crossed the age marker 

which requires him to annually take a taxable distribution from his 

Traditional IRA. I know he consistently gives offering/tithe to his 

church and also monetarily supports a few non-profit organizations. 

He doesn't necessarily need the IRA income right now and would 

prefer not taking the withdrawal, since it increases his taxes, but it is

the law. We have already done some long-term planning around his 

desires and plans for his children and ministries upon his death. While

I met with him, I introduced the consideration of utilizing the QCD 

rule. Since he will continue to gift money regularly in coming years, 

it will be wise to utilize the income exemption for donating directly 

from his IRA accounts. 

 

For many M2 clients/friends, donating money to their church, a 

meaningful non-profit ministry or preferred charity is a regular part of 

their finances and budget. While there is no secret tax-shelter silver 

bullet, over the years there have been various ways we have helped 

clients structure appropriate tactics to reduce tax exposures and 

facilitate their desire to support and give to organizations that are of 

special concern to them. The Qualified Charitable Distribution (QCD) 

is a very valuable financial tool.  Although not commonly discussed or 

understood in general financial communications, the QCD is a 

significant and strategic use of current IRS rules to reduce taxes and 

design wise income/tax planning.  

 

Basically, the QCD allows gifting of money to qualified non-profit  

entities in a way the fulfills the necessary assigned withdrawal value 

of account assets once is is in the RMD phase of IRA ownership. This 

tactic bypasses income tax while simultaneously completing the necessary

distribution.  This can be a significant benefit because it also reduces the  

AGI (adjusted gross income) calculation, which for most tax-payers, has 

a direct influence on their marginal tax bracket and can have a significant 

impact on deductions eligibility.  For those that itemize their deductions 

using Schedule-C with their tax return, AGI is an important number to 

manage whenever possible.

  

 

The QCD rule offers you a way to reduce your taxable income through

 a charitable donation without having to realize the 

money as a taxable distribution and then subsequently itemize the 

donation. Because AGI is used for many tax calculations, having a 

smaller number allows you to stay in a lower tax bracket, reduce or 

eliminate the taxation of Social Security or other income, and still 

remain eligible for deductions and credits that might be lost if you 

had to declare the RMD amount as income.

Many people have a traditional Individual Retirement Account (IRA).  

In fact, an individual can have multiple IRA accounts with different 

custodians (banks, brokerages, trust co, etc). Under the current law, 

as of January 1, 2023, owners of an IRA must take withdrawals from 

their IRA in the year they turn age 73.  This will be extended to 75 in 

coming years.  This has changed recently from a previous age of 70.5.  

Once this age has been reached, each year a distribution amount from 

the combined value of all traditional IRA accounts is determined by 

an IRS actuarial table and must be distributed.  The initial RMD must 

be distributed by April 1 of the year following reaching qualified age. 

The primary calculation used for this is the Uniform Lifetime Table 

produced by the IRS each year.  There are a few exceptions for use of 

this table; if the IRA is already owned by beneficiaries or the age 

of the spouse is greater than 20 years different than the owner, but those 

exceptions are relatively few. 

 

This mandatory withdrawal is called RMD (Required Minimum Distribution).  

In essence, an RMD is calculated by the actuarial life expectancy of 

the owner and value of the IRA account.  The table belowdisplays 

the information for 2022.

 

 

By taking current age and dividing the total value of all IRA accounts, 

an RMD calculation is determined. For instance, a 73 year old man 

with a total IRA value of $100,000 as of 12/31/2022 would be required 

to take a distribution of $3,774 ($100,000 / 26.5 = 3773.58) in 2022.  

This calculation is done annually each year, based on the end of previous 

year values for each IRA account and is available from the 

custodian of record for any IRA account in relation to the value they have 

on record.  This means that if an individual has multiple accounts at 

various custodians or banks, each account will have a calculated RMD.  

It is allowable to combine multiple account RMD values and make a 

distribution from one IRA.  

The RMD rules also apply to 401k and 403b type retirement accounts, 

but with some slight variations.  Of note, this specific qualifying 

distribution is not eligible from 401k or 4013b accounts. Currently, 

only the traditional IRA structure is eligible for QCD.  A 401k account 

would need to be moved (rollover) to an IRA for the money to be 

eligible to qualify as a QCD.  Contact your advisor to learn more about 

rules relating to employer-sponsored RMD rules.

The owner of an IRA will be required to take this withdrawal if you 

have a traditional Individual Retirement Account (IRA), you must 

start withdrawing some of the money upon reaching a certain age. That 

age has been adjusted several times, but as of Jan. 1, 2023, it's the 

year you turn 73.  For specifics on the dates and requirements for 

taking the distribution, consult your advisor.

The IRA Qualified Charitable Distribution (QCD) allows individuals 

age 70½ or older to make an outright donation to a non-profit/qualified 

charity (501c3) from a traditional IRA. This withdrawal amount will 

count toward your annual required minimum distribution (RMD). 

Although the RMD is not required until age 73, the QCD can be 

particularly beneficial for donors who do not itemize and instead file 

the standard deduction.  The current maximum amount that can qualify 

to categorized as QCD in a single tax-year is $100,000. 

• There are no income limits for QCD eligibility

• The QCD rule can effectively reduce your income taxes by lowering 

  your adjusted gross income (AGI).

• The money must be paid directly to an approved charity.

• If you donate a portion of your RMD, you must take the remaining 

  distribution amount yourself as taxable income.

Using the QCD to fulfill RMD accomplishes multiple needs, fulfilling 

the RMD requirement and also avoids having to “realize” that distribution 

as income. This reduces taxable income exposure, thereby reducing AGI.  

Although the QCD amount cannot be considered a charitable gift for 

deduction purposes, the reduced income tax and reduced AGI is a 

significant benefit.

For most traditional IRA owners who are already in their RMD phase 

and are consistent financial givers to their church, ministries or 

charities, the QCD is a wise stewardship consideration.

There are necessary steps to take with custodians and tax preparers in 

order to accomplish the QCD benefit and there are also various ways 

to donate assets from an IRA, not just money, in order to make tax-beneficial 

donations.  If you have questions and want to know more about QCD 

and would like help setting up your IRA for QCD distributions or 

want to discuss other strategic stewardship strategies for donating, 

while at the same time reduce taxes and be more financially efficient, 

call (661-347-0202) or email (info@m2sg.net) our office and we will 

be glad to assist.

-Mark MacArthur AIF

 

*Acronyms mentioned:

QCD - Qualified Charitable Distribution. A tax-exempted distribution 

from a traditional IRA. 

IRA - Individual Retirement Account. Considered a Qualified Account 

and has various structure types.

AGI - Adjusted Gross Income. The primary number on tax return 

determining marginal tax bracket.

RMD - Mandatory amount to be distributed from an IRA belonging 

to owner over 73 years old. 

AIF - Accredited Investment Fiduciary. An industry certification for 

completing annual Fiduciary training and awareness.