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Quentin was the firstborn child in a large family. Throughout his childhood, Quentin’s parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and saving as much money as possible. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer’s matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into a traditional IRA. As he approached retirement, Quentin continued to contribute to his retirement by maxing out his IRA contributions each year.
With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Given his lifetime savings, investment income and social security distributions, Quentin does not feel he needs the additional income that his IRA distributions will provide – especially with the increased taxes tied to that income.
Quentin understood that making a gift from his IRA to charity before reaching 70½ would be treated as taxable income (see Part 1). Based on that knowledge, he decided to wait to donate a portion of his IRA to charity until after his “half-birthday.” Quentin decided to call his tax advisor to discuss whether donating from his IRA at this time would be the best option for making a charitable gift.
Quentin’s advisor explains that because he has now reached age 70½, he is eligible to make an outright tax-free gift to charity from his IRA. Internal Revenue Code Section 408(d)(8) describes the circumstances under which an IRA owner may make a qualified charitable distribution (QCD), also known as an IRA charitable rollover. Quentin may distribute up to $108,000 in 2025 directly from his IRA to a qualified charity. Qualified charities include Sec. 509(a)(1) and Sec. 170(b)(1)(A) public charities. Section 509(a)(3) supporting organizations and Sec. 4966(d)(2) donor advised funds are not qualified recipients of QCDs.
The advisor also points out that although Quentin is now 70½ and eligible to make a QCD, he is not yet required to take a distribution from his IRA. The SECURE 2.0 Act increased the age at which required minimum distributions (RMDs) begin from 72 to 73. If Quentin was 73, he could make a QCD up to $108,000 to satisfy his RMD. However, if Quentin proceeds with a QCD at this time, his IRA balance will be reduced when his RMDs start.
If the QCD rules are met, the distribution will not be included in Quentin’s taxable income for the year. However, he will not receive a charitable income tax deduction for the transfer. Usually, donors must itemize their tax deductions in order to benefit from charitable giving. However, an IRA charitable rollover allows non-itemizers to benefit.
In addition to benefitting non-itemizers, the QCD is regarded as a “universal deduction” and is beneficial for taxpayers who have already reached their deduction limitations for the year. A taxpayer may deduct up to 60% of his or her adjusted gross income (AGI) each year for cash contributions and up to 30% of AGI for contributions of appreciated property. Donors who have reached these limits may still make IRA charitable rollover gifts. This is because the IRA charitable rollover allows donors to make a charitable contribution without providing a charitable deduction.
Quentin understands that he will not have RMDs this year, but he decides to test the QCD waters anyway. As a non-itemizer, Quentin likes the idea of being able to donate to charity while reducing his taxable income when his required minimum distributions begin at age 73. Therefore, he makes a modest QCD from his IRA at age 70½ and plans to make larger QCDs once his RMDs begin at age 73.
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