As the calendar year winds down, many retirees feel a desire to make an impact, simplify their finances, and finish the year well. If you’re age 70 ½ or older, or you’ve built up appreciated investments over the years, using Qualified Charitable Distributions (QCDs) or Donor-Advised Funds (DAFs) before year-end can be an incredibly effective way to combine generosity and smart tax planning.
Qualified Charitable Distributions (QCDs):
A QCD allows you to donate directly from your traditional IRA to a qualified charity. For many retirees, it’s the cleanest, most tax-efficient way to give.
- Eligibility: You must be age 70 ½ or older on the date of the distribution.
- 2025 Limit: Up to $108,000 per person can be donated.
- Tax benefit: The donated amount is excluded from your taxable income.
- RMD advantage: A QCD can count toward your Required Minimum Distribution (RMD), helping you reduce your taxable income for the year. For example, if your RMD for the year is $30,000 and you make a $10,000 QCD to a qualified charity, only $20,000 of your RMD would remain taxable. You meet your withdrawal requirement while supporting a good cause.
Reducing taxable income can also help lower Medicare premium surcharges and reduce the taxation of Social Security benefits, an overlooked ripple effect that makes QCDs especially valuable.
Donor-Advised Funds (DAFs):
A Donor-Advised Fund works like a charitable investment account. You contribute cash or appreciated securities, receive an immediate tax deduction, and then recommend grants to your favorite charities over time.
- Immediate deduction: You get the charitable deduction in the year of contribution, even if the charities receive funds later.
- Gift appreciated assets: Donating long-held stocks or funds avoids capital gains taxes while allowing you to deduct their fair market value.
- Control and flexibility: You can invest the funds inside the DAF for potential growth and make gifts on your own schedule.
DAFs are particularly useful in years with unusually high income, such as after selling a business, realizing large capital gains, or doing a Roth conversion. By “front-loading” your giving, you can manage your tax bracket while supporting the organizations you care about.
Combining QCDs and DAFs:
While you can’t make a QCD directly to a donor-advised fund (the IRS doesn’t permit it), many retirees use both strategies together.
- Use QCDs from your IRA to make annual gifts and satisfy RMDs.
- Use a DAF for larger, long-term charitable goals, gifting appreciated investments or cash for a more flexible schedule.
This two-part approach allows you to maximize tax benefits now while building a philanthropic plan for the future.
Why the December 31 deadline matters:
To qualify for 2025 tax benefits, your QCD and DAF contributions must be completed by December 31 (not just initiated).
- For QCDs, the funds must leave your IRA custodian by year-end and be payable directly to the charity.
- For DAFs, the transfer of cash or securities must settle before December 31 to count for the current tax year.
Given how long custodians and charities can take to process transactions in December, acting early in the month helps ensure your gifts are executed on time.
Philanthropy shouldn’t feel transactional. It’s an extension of your values. But when handled thoughtfully, charitable giving can strengthen your financial picture. Using tools like QCDs and DAFs allow you to be both generous and intentional, turning year-end giving into a coordinated piece of your broader plan.
If you’d like to review how charitable strategies fit into your overall retirement and tax plan, don’t hesitate to reach out. We can help evaluate your options and collaborate with your CPA or attorney to make sure your giving is executed smoothly and tax-efficiently.
Disclaimer: The information above is for general educational purposes only and should not be considered financial, tax, or legal advice. Always consult with a qualified professional regarding your specific situation. You should consult with your CPA and/or attorney before implementing any estate planning, gifting, or tax-related strategy.