The end of the year comes fast and furious, so it’s no surprise when some things, including your finances, fall by the wayside. However, if you’re retired, be cautious not to overlook your financial affairs entirely.
If you’re age 73 or older and own a traditional IRA or other retirement plan, the IRS requires you to withdraw a certain amount from your retirement accounts each year — and those withdrawals are taxable.
However, there is a tax-friendly way to satisfy your required minimum distribution (RMD) obligation and make a difference by giving directly to charity.
What is an RMD and Why Does it Matter?
An RMD is the amount of money that must be taken out of any employer-sponsored retirement plan, like a 401(k) or individual retirement account (IRA), once you reach a certain age. You have until April 1 after you turn 73 to make that withdrawal.
These distributions count as taxable income, which can increase your overall tax bill, push you into a higher tax bracket, or even raise your Medicare premiums.
The specific amount you must withdraw is determined based on the value of the account before the end of the previous year, divided by a denominator based on your age that year.
Failure to withdraw the full amount by the due date will result in one of the worst penalties the IRS can hand out — a 25% penalty of the amount that should have been withdrawn, plus any income taxes owed on that amount.
How Giving to Charity Can Help Lower Your Tax Burden
One of the biggest questions facing retirees is: How can I take my RMD without taking such a big tax hit?
That’s where year-end giving comes into play. You can use charitable giving to satisfy your RMDs through a tax-smart strategy called Qualified Charitable Distribution (QCD).
A QCD allows those age 70 ½ or older to make a charitable gift directly from a pretax account to a qualified charity of their choice. For 2025, you can donate up to $108,000 from an IRA and satisfy part or all of your RMD without paying income tax on the amount donated.
Step-by-Step Guide for Giving via QCD
For many retirees, this strategy is one of the most effective ways to give to charity. If you decide to use a QCD for your year-end giving, make sure you follow these steps:
- Confirm your charity is eligible. Any organization must be a qualified 501(c)(3) nonprofit.
- Contact your IRA custodian, such as your bank or brokerage and ask them to send the funds directly to the charity. *If you take the money first and then write your own check, it won’t qualify as a QCD.
- Complete the transfer before December 31. This allows the donation to count toward this year’s RMD.
- Keep a receipt from the charity for your own record-keeping.
How Can Retirees Balance Income Needs with Charitable Goals?
We all want to give of our time and money, but it’s important to do so without jeopardizing your financial future.
Before giving to charity, retirees should first discuss their goals and agree on how much they want to give. The second step is to consult a financial advisor and tax professional. This ensures that the left hand knows what the right hand is doing, and that your charitable giving fits into your customized financial roadmap.
At Zephyrus Financial Services, everything is done with the client’s overall financial plan in mind. We believe you need to know someone to understand what is best for their money. We get to know each and every one of our clients before making any financial decisions.
The end of the year is a great time to review your RMD strategy and think about your charitable goals. Combining generosity with smart tax planning can benefit both you and your favorite charity. To find out if a Qualified Charitable Distribution (QCD) is right for you, give us a call or set up a meeting with one of our advisors.