Un-tax your IRA!

Introduction: The IRA has been around now for many years as a government approved vehicle for retirement savings. It’s general characteristics are 1. You “contribute” allowable amounts before paying “income” tax, 2. Money in account can grow without any tax consequences and 3. All the money in it is considered “qualified”, meaning un-taxed. Thus when the time comes to take some of your money, it is ALL considered to be ordinary so-called “Income.”

The result is, at retirement time, you may have a nice IRA nest egg, but the government considers it belongs to them, and generally you owe “income” tax when you take it.

Now at about the age of 70, the IRS requires you to draw a specific percentage each year, to report it on your 1040, and to pay whatever they say you owe. But in the case you do not really need it, it is possible to avoid the tax! I will leave it to the reader to go check the specific rulez and follow them, lest you get taxed in spite of trying not to.

The magic method is called QCD, or Qualified Charitable Donation! Generally, any 501c3 organization and most churches. If you are charitable anyway, this is a slam dunk. Potentially you can spend your entire IRA and your charities can receive it ALL and not pay tax! It’s about the only way I know to avoid getting taxed on the money you earned.

Happy giving!


I think it is now age 72

But yes if you are charitably inclined it’s a great idea

In practice, the way it woks out us pretty slick, especially if you have to take RMDs and the standard deduction is the best fit for your situation.

All you have to do is have your IRA manager cut a check to your qualifying charity and send it to you. Then you simply forward the check to the named charity. I suspect the IRA managers do this to avoid a finger-pointing scenario if something like a question about the donation’s legitimacy occurs.

Then at tax time you modify the 1099 to reflect the non-taxable amount and you don’t pay taxes on it. It’s a great workaround for us old geezer types. You get to take the generous standard deduction AND in effect, deduct the charitable donation.

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E-Trade has a slick way to do this, with a drop-down menu of charities and the option to make the gift anonymous. Takes two minutes and it’s done.

Very nice! Keeping money out of the governments hands is always a good idea.

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I live in a high tax state. I plan to move to a zero tax state in retirement thus avoiding state tax on my IRA.

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As does Fidelity. Charities can be reviewed through their web site and checks can be ordered online.

We also have a Fidelity Charitable account (donor advised fund, or DAF), but tax regs require that QCDs (qualified charitable distributions) be paid directly to a charity and not to a DAF.

Anyone making a QCD exceeding $250 to a qualified charity should be aware the IRS has specific language that the charity must use in its donation confirmation. We’ve found that many smallish charities are not aware of those requirements and I’ve reminded several when their confirmation letter was lacking. That is discussed here.

Most financial organizations, if not all, will not reflect QCDs on the 1099R because they don’t want to assume the responsibility for a possible error or vetting organizations. The IRS prescribed method is to report the total of all distributions from your IRA in box 5a (2021) and the taxable portion in box 5b (2021), then write ‘QCD’ on the line immediately left of box 5b. I fail to understand why there is not a QCD box or check box on the 1040.


The comments on ease of taking a QCD distribution are a bit off topic, but I think are still relevant. It could influence where you have your account from which to draw!

Adding the above comments to my own experiences, I will list some from easy to awful…

  1. Easy: Fidelity & E-Trade drop down and request

  2. Fairly easy: Schwab, using your own abbreviated (1 page) request form.

  3. Moderate: Schwab, with form APP20071 (9 pages)

  4. Awful: USAA Annuity – like pulling teeth

We will leave it open for comments on other custodians’ ease-of-drawing.
If anyone can use the cut-down Schwab form I’ll be happy to share.

This topic is almost as silly as “don’t pay off your mortgage because you can deduct the interest.” Sure you’ll pay less tax if you donate your IRA, but you won’t have the money from your IRA. If that’s what you want to do, go right ahead, but don’t make it out like you’re fooling the taxman and coming out ahead financially. My goal isn’t necessarily to pay the least amount of taxes.

That said, I fully expect to do this if it’s still an option when I am of the age to take RMDs.

Ah thank you ratbert for your analogy. And I strongly disagree that the QCD is anything like the example of mortgage interest deduction. There you are paying one evil entity (bankster) and getting to pay less to another (government).

With the QCD, you are depriving the government in favor of your chosen charity. Of course if you needed the money, you could take it, confess “income” on a 1040 form, and pay tax on what IRS would say you owe to get money you worked for. They get their cut.

With the QCD, you can give more to your charity because the gestapo gets none of it! It is a cool way to actually use money that you worked hard for, converting “qualified” taxable funds into tax free.

Again, there is no compulsion to actually do the QCD but it is a nice option. As I told my lawyer when I explained it to him, “You are going to put money in the plate anyway. Why not let it all go there instead of giving some to government.”

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With Vanguard you just call and ask them to cut the check and they’ll mail it to you. You forward it to the recipient.

Or you can do it on their website with about 6 clicks and then wait for the checks to come and you forward them to the charity.

If i am planning to make a charitable donation anyways, the overall financial/tax difference is preferable to make a QCD for that amount than to withdraw the same $ amount and pay taxes on that amount.

The point of a retirement account is to provide funds to live your lifestyle in retirement. For some peopke, charitible donations are important; for others, less so.

I just wish that QCD’s were available before mandatory RMD’s…

If you have appreciated securities held more than one year in a taxable account, you can do something similar. Donate the shares, and deduct the total value. Don’t pay tax on the gains. This is what I’ve started doing, rather than donating cash.

Example: in 2020, I buy a mutual fund for $6,000. In 2022, it’s worth $10,000, and I transfer it to my favorite charity. I take a $10,000 deduction on Schedule A. This deduction is only helpful if I’m itemizing anyway. No tax is paid on the $4,000 gain.

Here’s the bad way: instead of donating the mutual fund, I sell it for $10,000 and donate the $10,000 cash. Then I pay long-term capital gains tax on the $4,000, but I can still deduct the $10,000. If I wouldn’t otherwise itemize deductions, this is a particularly bad deal.

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Additionally, someone can set up a charitable account with one of the major financial firms (we use Fidelity). They are also called donor advised funds (DAF).

We funded our DAF by donating stocks that had appreciated in value. One can deduct the entire market value of the donated stocks as a charitable donation when made, and later direct donations from the DAF to charities of their choice. One can also designate how that DAF makes distributions after your death. There are no capital gains on the increased value. Unfortunately, donations to a DAF are not allowed for RMDs, which must be made directly to a charity.

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Another way to un-tax yourself is take SS at 70, retire earlier than that, and during those low income gap years do some Roth conversions when your tax rate is low.