What Is a QCD?

From IRS Publication 590-B

A qualified charitable distribution (QCD) generally is a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions. You must be at least age 70½ when the distribution was made. Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for a charitable contribution. See Records To Keep in Pub. 526.
The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse also can have a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.

This doesn't seem particularly exciting—you can't even use QCDs until you're 70.5! But the magic of QCDs comes in the next sentence:

A QCD will count towards your required minimum distribution, discussed earlier.

What is a RMD?

Once you reach 70.5 years of age, you must withdraw a minimum amount each year from your traditional (not Roth) IRA. This minimum amount is known as the Required Minimum Distribution (RMD). In general the RMD increases each year[1].

What is the Significance of a QCD Counting Towards the RMD?

Charitable donations are already tax deductible. So it may not seem significant that QCDs count towards RMDs when a taxpayer could take a RMD normally, donate it to charity, and then deduct the RMD amount from his/her taxes.

However, deducting charitable contributions require you to itemize your taxes, which in general requires the sum of all of your itemized deductions to exceed your standard deduction[2]. Even then, your benefit from itemizing is only proportional to the amount in excess of your standard deduction, which is $12,000 for single and $24,000 for MFJ (married filing jointly). It would be quite rare for someone over 70.5 to itemize his/her deductions.

On the other hand, a QCD isn't included in income (to the extent that it doesn't exceed $100k, would otherwise qualify as a charitable donation, and would otherwise be included in income). In other words, the QCD is deducted from income without having to itemize deductions.

Any retiree over 70.5 that donates to charity should first use QCDs from their traditional IRA before using any other source of money.

  1. What actually happens is your RMD is calculated as your IRA balance divided by a value that increases each year. In general this value will increase each year until your withdrawals outpace the growth in the account ↩︎

  2. Some states require you to take the same type of deduction - standard or itemized - on your state return as your federal return. In these states it is possible to pay less in total by itemizing even when your itemized deductions don't exceed the federal standard deduction, because the savings from itemized deductions on your state return can be greater than the extra taxes paid to the federal government ↩︎