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The Best Way for Retirees to Give to Charity

6 Minute Read

If charitable giving is a significant part of your retirement plans, you have a lot of options for making your contributions. You can donate cash directly, send appreciated stock to your charities of choice, or use a donor-advised fund to manage your contributions and distributions each year. While each has its pluses and minuses, the best option for many older retirees is a qualified charitable distribution from a traditional IRA.

What's a qualified charitable distribution?

A qualified charitable distribution, or QCD, is a withdrawal from an IRA that's paid directly to a qualified charity. The account owner must be at least 70½ years old at the time the distribution is made (not merely turning 70½ that year).

One of the benefits of using a QCD is that the withdrawal counts toward required minimum distributions (RMDs), which begin at age 72. They're limited to $100,000 per taxpayer per year, which will cover the vast majority of RMDs, but it's still important for those interested in writing some big checks for charity.

Importantly, when you make a qualified charitable distribution, you'll receive a 1099-R. You'll see the total distribution listed, but the taxable amount will be $0. That means a QCD doesn't count toward your income like other distributions. Not only does that make the distribution tax-free (as you would expect for charitable donations), but it has other big tax benefits for retirees.

Moving charitable donations above the line

There are two kinds of tax deductions -- above the line and below the line. Above-the-line deductions are called that because they go above the line on your tax return listing your adjusted gross income. That means you always get to take those deductions, whereas below-the-line deductions require you to itemize instead of taking the standard deduction.

With the exception of a special rule for 2020 and 2021, charitable contributions are typically a below-the-line deduction. That means that in order to get the full tax benefit of contributing to charity, you must have enough itemized deductions to surpass the standard deduction. For 2021, the standard deduction for a couple over 65 filing jointly is $27,800. That's a high bar for many retirees.

A QCD, in effect, moves the charitable donation above the line by allowing you never to include the distributed IRA money as taxable in the first place. Since the taxable amount of the distribution is $0, it won't affect your adjusted gross income. That means you're free to take the standard deduction and get the full tax benefits of your charitable contribution.

The added benefits of a lower adjusted gross income for retirees

Keeping charitable contributions out of your adjusted gross income has some added benefits for retirees receiving Social Security benefits, paying for Medicare, or deriving the vast majority of their income from investments.

For one, the tax treatment of Social Security benefits is partially determined by your adjusted gross income (AGI). The IRS uses a metric called "combined income," which is the sum of half your Social Security benefits, your AGI, and any non-taxable interest. So, a lower AGI could mean less tax owed on your Social Security payments.

Additionally, there are deductions and credits that are limited to low-income households, where income is defined as your adjusted gross income (perhaps with some modifications).

For wealthy retirees, limiting AGI can ensure you pay the standard Medicare Part B premium. Premiums start climbing when a couple's AGI exceeds $176,000 for a couple or $88,000 for a single retiree in 2021.

Keeping your AGI below the net investment income thresholds can also save taxes for retirees with sizable incomes from investments, including rental property income or capital gains on security sales. Couples with an AGI above $250,000 will pay an additional 3.8% net investment income tax on the portion of their income exceeding the threshold.

So, using a QCD instead of taking a regular distribution and donating to charity can have additional tax advantages. That makes it the best way for retirees to give to charity, especially if they have a considerable amount of funds left in their traditional IRAs in the middle years of their retirement.


This article was written by Adam Levy from The Motley Fool and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to

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