Beat the Taxman: How Qualified Charitable Distributions Can Reduce Your RMDs

The worst piece is that all investors are forced to pay these taxes even if they don’t want to.

But there is a way to overcome these dreaded required minimum distributions (RMDs) from retirement vehicles. And this way could do some good. Qualified charitable distributions (QCDs) allow investors to boost their philanthropy while reducing what they owe Uncle Sam. But it only works if they get the timing right.

The 401(k) plan and similar workplace retirement plans like 403(b) or 457 have quickly become THE way many investors save for their golden years. To that end, these vehicles are often many investors’ largest accounts.

The beauty is that many retirement plans allow for tax deferral of gains, interest, and dividends. So as the years go by, investors don’t have to worry about what goes on inside the account. This allows for additional compounding potential and lets time work its magic. The issue comes later on. Tax deferral does not equal tax-free.

Eventually, Uncle Sam wants his money. This is where 401(k)s, IRAs, and similar retirement vehicles are subjected to what’s called required minimum distributions (RMDs).

The amount you need to withdraw is based on your account balance at the end of the previous year and your life expectancy based on your age. That withdrawn amount is then taxed at ordinary income rates. Get the number wrong or don’t withdraw enough, and there are some stiff penalties. Forgetting to take them at all will attract the maximum level of penalties and fees. The worst part is the IRS will force you to withdraw money from the accounts, even if you don’t need it for retirement spending.

The SECURE Act 2.0 did help ‘kick the can down the road’ on RMDs, extending the age at which investors are forced to start taking them. But they are still coming for many investors. This is why they may want to consider a QCD from their IRA.

A QCD is a direct transfer of funds from your IRA—rollover or traditional—payable directly to a qualified charity. It should be noted that donor-advised funds and private foundations do not qualify for QCD treatment under current rules. And technically, you can conduct a QCD from a Roth, but since distributions are tax-free, it doesn’t make much sense. You must be at least 70½ years old at the time you request a QCD for it to count. The win is that because a QCD withdrawal is a direct transfer, it is excluded from your taxable income and won’t go toward raising your income taxes that year.

The extra win is that a QCD can also count toward satisfying your RMD for the year. And the amount of coverage is significant. The SECURE Act indexed QCD amounts to inflation. For 2025, the number is $108,000. Additionally, investors can make a one-time QCD of up to $54,000 in 2025 to fund a split-interest entity. Split-interest includes Charitable Remainder Unitrusts (CRUTs), Charitable Remainder Annuity Trusts (CRATs), and Charitable Gift Annuities (CGAs).

With a QCD, investors can ultimately lower their tax bills and satisfy their RMDs. But like many things in the world of finance, it’s not always as simple as clicking a mouse or writing a check.

The key for QCDs is timing, both when you take the withdrawals and the deadlines for RMDs.

Many investors often take their RMDs as either one lump sum at the start of the year or periodically throughout the year as monthly or quarterly payments. That’s bad news for QCDs. That’s because of the IRS’ so-called First Dollar Out Rule. Essentially, the rule states that the first dollars an investor pulls from an account go to satisfy their RMD.

So, if you withdraw money first from an IRA and then hope to do a QCD later in the year, you’ll end up paying taxes on both. The QCD will get treated and taxed as a regular withdrawal, and you’ll pay ordinary income taxes on it.

That means investors need to make their QCD first to cover the RMD, then make their normal withdrawals from the account. Incidentally, investors can also use a QCD to cover only a portion of the RMD. But here again, it has to be made first before they take the RMD.

Aside from this timing issue, investors need to think about when they are required to do their RMDs. The deadline for taking your RMD is December 31 each year. For your first RMD—and only your first—you may delay taking a distribution until April 1 of the year after you turn 73. But if you wait, you still need to make your second RMD by December 31 of that year.

For investors, QCD opens up a ton of planning potential and tax savings ability.

A prime example is using a QCD to fund a split-interest entity. A charitable gift annuity can be used to generate an income stream for the giver, while still providing a philanthropic benefit for the charity. Investors can potentially remove some RMD burden and save on taxes while still being able to generate income from their portfolios.

It can be advantageous for investors who decide to wait until April 1 of the following year to take their first RMD. Because you are making two RMDs in one year, using a QCD to cover the first one could help limit the tax bite, while allowing for more portfolio compounding.

This additional tax alpha can be a major win for investors and result in more long-term wealth generation. Additional planning scenarios can be considered when including Roth and taxable accounts, potentially eliminating taxes altogether.

In the end, QCDs are a wonderful tool for portfolios and investors in their golden years. They can seriously help reduce taxes and remove RMDs from the equation. The key is to get the timing right. This has to happen first before any other money is withdrawn from the account. But if investors get the timing right, they are a great asset to consider.

QCDs could be the tool to keep Uncle Sam at bay. These direct payments can help reduce RMDs and boost long-term wealth creation. They require a little legwork, but they can add a host of planning benefits for portfolios.