Year-End RMDs and the QCD Workaround Strategy

While the current required beginning date for RMDs is age 73, taxpayers remain eligible to execute a QCD starting at age 70.5.

Under the Secure 2.0 Act, taxpayers are allowed to make a one-time qualified charitable distribution of up to $50,000 from an IRA to a charitable remainder trust or charitable gift annuity. As with the traditional QCD option, the distribution will count toward the taxpayer’s annual RMD obligation without generating any tax liability.

The income payments of 5% or greater from the charitable remainder trust or charitable gift annuity to the donor (or spouse) must begin within one year of the date that the vehicle is funded — and those payments are taxed as ordinary income when received. Only the donor and the donor’s spouse (or both) can receive the income from the split-interest vehicle.

Often, the payment amounts are determined based on rates provided by the American Council on Gift Annuities. These payments can continue for a predetermined period of time or for a person’s lifetime and, after the payments cease, the remainder passes to the qualified charity.

QCD Areas of Confusion

For clients that have reached their required beginning date (currently 73), the first dollars out rule can generate confusion over the QCD option. Confusion also exists in situations where clients take a portion of their RMD in cash and also use the QCD strategy to satisfy the remaining withdrawal requirement.

Clients should be advised that the first funds they withdraw from an IRA each year always count toward their RMDs. Once the required distribution has been taken, the taxpayer is not permitted to execute a QCD later in the year to offset that distribution. Because QCDs count toward the RMD, it’s advisable to execute a QCD earlier to avoid any mix-ups.

The problem often arises when a taxpayer takes a distribution to cover expenses and later decides to do a QCD. The amount withdrawn before the QCD is executed will be taxable regardless of whether the taxpayer’s QCD would have offset the amount initially withdrawn.

It’s also important to note that the QCD amount is not limited to the client’s RMD amount for the year. Clients can use the QCD to donate much more than their RMD amount, so long as the entire QCD amount does not exceed the $105,000 threshold for 2024.