Qualified charitable distribution popularity surges

Qualified charitable distributions (QCDs) are a largely unknown tool among retirees. But now, as a convergence of rule changes and marketing efforts shines a spotlight on the often overlooked instrument, financial advisors say that’s starting to change.

The tool, introduced in 2006 by the Pension Protection Act, allows retirees age 70½ or older to donate up to $108,000 directly from their taxable IRA to one or more charities. This charitable giving strategy allows individuals to satisfy their required minimum distributions (RMDs) without officially taking the distribution as income. Doing so can help prevent their income from reaching higher tax brackets and avoid the phase-out of other tax deductions.

Until a couple of years ago, the annual QCD limit was capped at $100,000. However, starting in 2024, provisions from Secure 2.0 indexed the QCD cap to inflation, giving wealthy retirees a greater ability to reduce their tax liabilities. 

Interest in the instrument has grown exponentially over recent years, according to search interest data from Google Trends.

Google measures search interest on a relative scale from 0 to 100, with 100 being the highest search interest in a given period. In the first five months of this year, search interest for QCDs averaged over 75 points, significantly higher than the average from the same periods in previous years.

Policy changes cast a light on QCDs

Experts say that changes from the Tax Cuts and Jobs Act of 2017, which capped state and local tax deductions and nearly doubled the standard deduction for filers, drove a shift toward QCDs and away from itemized charitable contributions.

“Up to that time, it was easier to itemize, so people were probably more likely to write out checks to charities or donate appreciated stock,” said Debbie Taylor, managing partner and chief tax strategist at Carson Wealth in Omaha, Nebraska. “Then, in 2017, with the passage of the TCJA, they doubled the standard deduction, and as a result, 90% of taxpayers take the standard deduction. And so what it means is that it’s much more difficult to get a tax benefit when you make a charitable contribution.”

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Post TCJA, qualified charitable distributions became one of the most tax-advantaged ways for retirees to gift IRA money to charity organizations, advisors say.

Along with inflated standard deductions, a $10,000 cap on SALT deductions has driven more retirees toward QCDs as their main pathway for charitable giving, Taylor said. That could change as Republican lawmakers move towards raising the SALT cap in the party’s tax-and-spending bill.

Late Tuesday, House GOP leaders and Republicans from high-tax states reached a tentative deal to increase the SALT deduction to $40,000 for Americans making up to $500,000 a year. That’s up from $30,000 in the current version of the Republican bill that’s set to receive a House vote this week.

Whether or not an increase in SALT deductions would disincentivize people from using QCDs is hard to say, Taylor said.

“We’re going to have to watch the numbers to see,” Taylor said. “We’re going from $10,000 to $40,000, possibly, so now for those high tax states, we could then be likelier to itemize. But remember a couple of things. Even if we go to $40,000, for the most part, that $40,000 is going to benefit those higher-tax states. That’s the New Yorks, the New Jerseys and the Californias. So, you could still be very interested in doing a QCD if you’re not coming from one of those states and not really benefiting from the expansion of the SALT deduction.”

“This is where a good financial advisor gets involved,” Taylor added. “When someone’s like, ‘Hey, I want to make a $5,000 contribution. What’s the best way to do it?’ We run the numbers, and we basically tell them, ‘You’ll save $3,000 on your taxes if you do it in the form of a QCD, but you’ll save $2,800 if you do it in the form of writing out a check,’ and then the client’s like, ‘Well, that’s real helpful information,’ and they can be guided accordingly.”

Where past generations of financial advisors may have talked conceptually about the pros and cons of such questions, advisors today have the technology to simply run the numbers, she said.

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Still, advisors say that making that calculation can often involve more than numbers alone.

“One of the lesser-discussed but real barriers is the emotional disconnect retirees can feel when using QCDs,” said Dave Flegal, founder of Flegal Financial Planning in Cleveland, Ohio. “Many clients are accustomed to writing physical checks to charities and experiencing the personal satisfaction of giving. With QCDs, the donation must be sent directly from the IRA custodian to the charity, removing the client from that tactile part of the giving process. For some, it makes their charitable efforts feel impersonal or transactional.”

In some cases, advisors can request IRA checkbooks for their clients to help restore some of the more traditional ritual of charitable giving, but not all custodians offer this feature.

A drive to educate

Policy shifts aren’t the only factor driving the increased popularity of QCDs. Nonprofit marketing around QCDs has been shown to drive use of the tool, according to research from FreeWill, a no-fee, online will-writing service that partners with more than 2,200 nonprofits.

In 2020, when RMD requirements were temporarily paused, many nonprofits chose to stop actively promoting QCDs to potential donors. The effects were clear. Nonprofits that stopped marketing QCDs in 2020 reported a drop in such gifts, while those that continued to market the tool saw an increase in QCD gifts, even as RMDs — one of the main drivers behind QCD usage —  were paused.

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Alongside nonprofit marketing efforts, financial advisors have their own role to play in educating clients about QCDs.

In 2024, 3 in 4 retirees said they did not know what a qualified charitable distribution is, according to research from Fidelity Charitable. Some advisors say that’s not always a problem — many retirees don’t have the desire, let alone the ability, to donate to charity. But Taylor argues otherwise.

“Sometimes you just don’t know,” she said. “I do think that advisors need to be more proactive and more engaged in educating their clients … I think this is a really important part of the profession now and going forward, and advisors that don’t do this are going to be left behind.”