Americans give billions of dollars to charitable organizations each year. Most of that giving happens in the least tax-efficient way possible: writing a check from a bank account or making a credit card donation. For retirees with retirement accounts, appreciated securities, or other tax-advantaged assets, there are giving strategies that accomplish the same charitable outcome with significantly less tax cost, sometimes dramatically less.
The most widely underused of these strategies is the Qualified Charitable Distribution. A QCD allows IRA owners aged 70.5 or older to transfer up to $105,000 per year directly from their IRA to a qualified charity, with the distribution counting toward the annual required minimum distribution but excluded entirely from adjusted gross income. For a retiree who is giving to charity anyway, the QCD is almost always superior to taking the distribution, paying tax on it, and donating the after-tax amount.
Beyond the QCD, retirees have access to Donor Advised Funds that allow the timing separation of the charitable deduction from the actual grant to charity, Charitable Remainder Trusts that provide income during life and a charitable bequest at death, and strategies for donating appreciated securities that avoid capital gains tax while taking a full fair-market-value deduction. Each of these tools has specific applications and specific limitations.
This paper explains each major charitable giving strategy available to retirees, how they interact with RMDs and IRMAA, how to choose among them based on the specific situation, and how to integrate charitable giving into the overall retirement income plan.
The combination of the higher standard deduction enacted by the Tax Cuts and Jobs Act of 2017 and the elimination of miscellaneous itemized deductions has significantly reduced the number of taxpayers who itemize deductions. Before 2018, roughly 30% of taxpayers itemized. After 2018, approximately 11% did. For retirees with mortgage payoffs and lower income, the percentage who benefit from itemizing is even lower.
The practical consequence is that many retirees who are making significant charitable contributions are no longer receiving a federal income tax deduction for those contributions. They're above the standard deduction threshold before the charitable giving even begins. The QCD and other strategies addressed in this paper are valuable precisely because they don't depend on itemizing. They reduce taxable income directly, regardless of whether the retiree itemizes.
A Qualified Charitable Distribution allows an IRA owner aged 70.5 or older to transfer up to $105,000 per year directly from a traditional IRA to a qualified public charity. The key rules: the distribution must go directly from the IRA custodian to the charity without passing through the account holder's hands, the receiving organization must be a qualified public charity under Section 501(c)(3) (donor advised funds and private foundations do not qualify), and the amount transferred is excluded from adjusted gross income.
The IRMAA benefit of QCDs is significant. Because the QCD is excluded from AGI, it does not increase modified adjusted gross income for purposes of Social Security taxability or Medicare premium surcharges. A retiree who would otherwise have an RMD pushing them above an IRMAA threshold can use QCDs to satisfy the RMD while keeping MAGI below the threshold. This benefit alone can be worth thousands of dollars per year in Medicare premium savings.
The annual limit of $105,000 per person is indexed for inflation under SECURE 2.0, the first inflation adjustment to the QCD limit since the strategy became permanent law. For a married couple where both spouses are over 70.5, each spouse can make QCDs up to $105,000 from their own IRA, for a combined household limit of $210,000 per year.
A Donor Advised Fund is a giving account sponsored by a community foundation, financial institution, or charitable organization. The donor contributes assets to the DAF, receives an immediate charitable deduction for the full contribution amount, and then recommends grants from the DAF to qualified charities over time. The DAF sponsor has legal control of the assets but customarily follows donor recommendations.
The primary tax benefit of a DAF is timing flexibility. A donor who wants to make a large charitable gift in a high-income year, perhaps the year of a business sale or a large Roth conversion, can contribute to the DAF in that high-income year to capture the deduction at the highest available marginal rate, then distribute the grants to charities over subsequent years. The deduction front-loads while the giving can be spread over time.
Contributing appreciated securities directly to a DAF is particularly efficient. The donor receives a deduction for the full fair market value of the securities, and neither the donor nor the DAF pays capital gains tax when the appreciated securities are sold inside the fund. This avoids the capital gains tax that would have been due if the donor had sold the securities and donated the after-tax proceeds.
A Charitable Remainder Trust is an irrevocable trust that provides income to the donor or other named income beneficiaries for a specified period, typically the lifetimes of the beneficiaries, with the remaining trust assets passing to charity at the end of the term. The donor receives a partial charitable deduction at the time of contribution, calculated as the present value of the charitable remainder interest.
The CRT is most appropriate for donors with highly appreciated assets who want to convert those assets to income without triggering immediate capital gains tax. Appreciated assets contributed to the CRT are sold inside the trust without triggering capital gains, and the proceeds are reinvested. The income stream is taxable as it is received, but the immediate tax on the full capital gain is avoided.
Donating appreciated securities directly to a charity, rather than selling the securities and donating cash, avoids the capital gains tax on the appreciation while producing a deduction for the full fair market value. For long-held positions with significant embedded gains, this can produce dramatically better results than selling.
Consider a stock purchased for $5,000 that is now worth $25,000, with $20,000 of embedded long-term capital gain. Selling the stock, paying 15% capital gains tax, and donating the after-tax proceeds generates a donation of $22,000 and a deduction of $22,000. Donating the stock directly generates a donation of $25,000, a deduction of $25,000, and no capital gains tax. The direct donation is superior by $3,000 in this illustration.
For retirees over 73 who are required to take RMDs, QCDs provide a mechanism to satisfy part or all of the RMD obligation without the distribution counting as taxable income. The RMD for the year is reduced by the QCD amount, and the QCD is excluded from AGI. This is the most tax-efficient way for charitably inclined retirees to satisfy their RMD requirements.
IRS data shows that QCD utilization, while growing since the strategy was made permanent in 2015, remains significantly below the levels that would be expected if all eligible charitably inclined retirees used it. Surveys suggest that awareness of the QCD is still limited among retirees and even among some financial advisors, contributing to the underutilization. The strategy's benefits are well established in the tax literature and confirmed by IRS guidance, but widespread awareness has lagged behind.
Giving USA, the annual publication on American charitable giving produced by the Giving USA Foundation and Indiana University Lilly Family School of Philanthropy, documents that individuals over 65 give significantly more to charity per capita than younger cohorts and account for a disproportionate share of total charitable giving. The efficiency of giving strategies for this demographic has significant aggregate impact on charitable organizations.
The American Council on Gift Annuities publishes research on charitable giving vehicles including CRTs and charitable gift annuities. Their work documents the income and tax benefits of planned giving strategies for donors and the funding benefits for charitable organizations. Their actuarial data on payout rates and present value calculations provides the framework for evaluating whether specific charitable remainder structures produce favorable outcomes for specific donor circumstances.
Any retiree over 70.5 with an IRA who is donating cash to qualified charities while also taking RMDs from the IRA should instead be directing those charitable dollars through the QCD. The QCD eliminates the income tax on the RMD amount used for the donation, while a cash donation produces a deduction only if the retiree itemizes. For most retirees taking the standard deduction, the cash donation produces no tax benefit while the QCD produces substantial benefit.
Selling appreciated securities to generate cash for a donation, then donating the after-tax cash, triggers capital gains tax unnecessarily. Donating the appreciated security directly achieves a larger deduction, avoids the capital gains tax, and produces the same charitable outcome. For any donation from a taxable brokerage account, the first question should be whether the assets intended for donation have embedded gains that could be given in-kind rather than after liquidation.
Retirees who take the standard deduction in most years but have a high-income year, perhaps from a large Roth conversion or a business sale, may have the opportunity to itemize in that year. Bundling charitable giving into the high-income year, potentially through a large DAF contribution that can then be disbursed over subsequent years, allows the deduction to be captured at the highest marginal rate and in a year when itemizing is beneficial.
QCDs are restricted to qualified public charities under Section 501(c)(3). Donor advised funds, private foundations, supporting organizations, and certain other entities do not qualify. A QCD made to a non-qualifying organization is treated as a taxable distribution from the IRA, eliminating the intended tax benefit. Verify that the recipient organization qualifies before directing a QCD.
For retirees over 70.5 with IRAs who intend to give to qualified charities, the QCD should be the default mechanism for all such giving up to the annual limit. Establish the QCD amount each year based on anticipated charitable giving and direct it before the end of the calendar year.
Review the taxable brokerage account for positions with significant embedded gains that might be appropriate for charitable gifting. For any planned donation from the taxable account, evaluate whether the in-kind donation of appreciated securities is more efficient than selling and donating cash.
If charitable giving is significant and periodic, a DAF provides valuable flexibility to decouple the timing of the deduction from the timing of the grant to charity. Contributing appreciated securities to the DAF before selling them avoids capital gains while maximizing the deduction and giving amount.
Charitable giving is part of the retirement spending picture and should be explicitly included in the retirement income plan. The retirement calculator at plan.johnkoyle.com includes charitable giving as part of the monthly spending budget. For retirees using QCDs, the portfolio draw can be reduced by the QCD amount, improving the overall plan's tax efficiency and extending portfolio longevity.
This question directly identifies the most common and most impactful missed opportunity.
This surfaces the appreciated security donation opportunity and quantifies the capital gains tax savings available.
This question evaluates whether the DAF bundling strategy is appropriate given the retiree's income pattern and charitable intent.
This question integrates the charitable giving strategy with the broader income management plan.
This question opens the conversation about planned giving vehicles including CRTs, charitable lead trusts, and bequest planning.
The retirement planning calculator at plan.johnkoyle.com was built to model exactly the dynamics discussed in this paper. The retirement calculator at plan.johnkoyle.com includes charitable giving as part of the monthly spending budget input. For retirees using Qualified Charitable Distributions, those amounts reduce the portfolio withdrawal requirement because they come directly from the IRA rather than from the portfolio. Model your retirement plan with and without the QCD strategy to see how redirecting charitable giving through the IRA affects your projected MAGI, your IRMAA exposure, and your overall after-tax retirement income. The difference can be significant for retirees with both charitable intent and RMD obligations.
John Koyle, AIF®, is the Co-Founder of Red Cedar Wealth Advisors, headquartered in Pocatello, Idaho. He holds the Accredited Investment Fiduciary (AIF®) designation, awarded by the Center for Fiduciary Studies (Fi360), which signifies completed coursework, a rigorous examination, and ongoing continuing education in fiduciary responsibility and prudent investment practices.
John serves individuals and families in or approaching retirement throughout eastern Idaho, the Pacific Northwest, and across the country via Zoom. Clients work directly with John, not a junior team. Red Cedar Wealth Advisors operates under Osaic Wealth, Inc. (Member FINRA/SIPC) and Osaic Advisory Services, LLC for investment advisory services.
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