Maximize Tax Efficiency: Qualified Charitable Distribution Strategies for Inherited IRAs

Setting the Stage for Inherited IRA QCDs

For federal employees approaching retirement, planning for the transfer of retirement assets to loved ones involves more than just deciding who gets what. Partnering with a financial advisor who specializes in federal employee benefits ensures that every decision is made with an eye toward taxes, survivor benefits, and long-term legacy goals.

The retirement landscape changed dramatically with the SECURE Act of 2019, which eliminated the popular “stretch IRA” strategy for many beneficiaries. Further refinements came with SECURE Act 2.0 in 2022. These legislative changes have created both challenges and opportunities, especially for those with charitable inclinations.

One powerful but often overlooked strategy lies in Qualified Charitable Distributions (QCDs) from inherited IRAs. For federal employees and retirees who want to minimize tax impacts while supporting causes they care about, understanding this approach is essential to your comprehensive financial strategy.

Understanding Inherited IRA RMD Rules Post-SECURE Act

The SECURE Act fundamentally reshaped how beneficiaries must handle inherited IRAs. Prior to this legislation, non-spouse beneficiaries could stretch distributions over their lifetime, potentially enjoying decades of tax-deferred growth. That’s no longer the case for many beneficiaries.

If you’ve inherited an IRA after January 1, 2020, here’s what you need to know:

The 10-Year Rule

Most non-spouse beneficiaries must empty the entire inherited IRA by the end of the tenth year following the original owner’s death. This accelerated timeline compresses what might have been decades of distributions into just ten years, potentially pushing beneficiaries into higher tax brackets. (See the IRS’s latest guidance in our summary of the finalized 10-year rule.)

Starting in 2025, after several years of IRS transition relief, beneficiaries subject to the 10-year rule will need to take annual Required Minimum Distributions (RMDs) during this period if the original owner had already begun taking RMDs before death. You can use our step-by-step Inherited IRA RMD calculator to project the exact amounts.

Eligible Designated Beneficiaries

Some beneficiaries are exempt from the 10-year rule and can still use the more favorable “stretch” provisions. These eligible designated beneficiaries include:

• Surviving spouses

• Minor children (until reaching majority)

• Disabled individuals

• Chronically ill individuals

• Individuals not more than 10 years younger than the account owner

IRS Relief and Future Enforcement

The IRS has provided penalty relief for missed RMDs from inherited IRAs for years 2021 through 2024. However, full compliance will be required starting January 1, 2025. The penalty for failing to take an RMD has been reduced from 50% to 25% of the amount not withdrawn, with further reduction to 10% if corrected within a specified timeframe.

What Is a Qualified Charitable Distribution (QCD)?

A Qualified Charitable Distribution is a direct transfer of funds from an IRA to a qualified charity. When executed properly, a QCD offers significant tax advantages over taking a distribution and then making a separate donation.

Key QCD Requirements

To qualify as a QCD, several conditions must be met:

• Age Requirement: The IRA owner or beneficiary must be at least 70½ years old at the time of the distribution.

• Eligible Accounts: QCDs can be made from traditional IRAs, inactive SEP or SIMPLE IRAs, and inherited IRAs.

• Eligible Charities: The recipient must be a 501(c)(3) public charity. Private foundations and donor-advised funds do not qualify.

• Direct Transfer: The funds must be transferred directly from the IRA custodian to the qualified charity.

Annual Limits

For 2025, the maximum annual QCD amount is $108,000 per individual (indexed for inflation). This limit applies to the total QCDs made from all IRAs owned by an individual, including inherited IRAs.

Tax Efficiency Benefits of QCDs from Inherited IRAs

For federal employees and retirees who inherit an IRA, QCDs offer several compelling tax advantages:

Exclusion from Taxable Income

Unlike regular IRA distributions, QCDs are excluded from gross income. This is more advantageous than taking a distribution and then making a charitable donation, even if you itemize deductions. The exclusion directly reduces your Adjusted Gross Income (AGI), which has cascading benefits.

Impact on Social Security Taxation

For federal retirees already receiving Social Security benefits, keeping your AGI lower through QCDs may reduce the amount of Social Security subject to taxation. This is particularly relevant as up to 85% of your Social Security benefits can be taxable depending on your income level.

Medicare Premium Reduction

Medicare Part B and Part D premiums are based on your modified adjusted gross income (MAGI) from two years prior. By reducing your AGI through QCDs, you might avoid IRMAA surcharges—see the details in our guide on RMDs and Medicare premium means testing—potentially saving thousands of dollars annually in healthcare costs.

Standard Deduction Compatibility

With the higher standard deduction established by the Tax Cuts and Jobs Act, many retirees no longer itemize deductions. QCDs provide a tax benefit for charitable giving regardless of whether you itemize, effectively allowing you to “double-dip” with charitable giving while taking the standard deduction.

Satisfying RMD Requirements

QCDs count toward satisfying your required minimum distributions for the year. For inherited IRA beneficiaries subject to annual RMD requirements, this creates an opportunity to meet obligations in the most tax-efficient manner possible.

Advanced QCD Strategies for Inherited IRAs

Understanding the basics of QCDs is just the starting point. Federal employees and retirees can implement several advanced strategies to maximize benefits:

Strategic Timing

Consider making QCDs early in the calendar year, especially if they will satisfy your RMD requirement. This approach provides more certainty in meeting RMD obligations while supporting your chosen charities.

Charitable Concentration

The 10-year distribution requirement for inherited IRAs creates an opportunity to concentrate charitable giving into specific years, potentially aligning with other tax planning strategies. For example, you might use QCDs to offset years with higher income from other sources.

Split-Interest Entity QCDs

SECURE Act 2.0 introduced an exciting new provision allowing a one-time QCD of up to $53,000 (for 2025, indexed for inflation) to fund a split-interest entity such as:

• Charitable Remainder Unitrusts (CRUTs)

• Charitable Remainder Annuity Trusts (CRATs)

• Charitable Gift Annuities (CGAs)

These arrangements allow you to receive income for life while directing the remainder to charity upon your death. This can be particularly valuable for federal employees and retirees who want to maintain income streams while fulfilling charitable goals.

QCD Limits and Key Rules for 2025

Putting It All Together

Navigating the interplay between inherited IRA rules, RMD timing, and charitable giving strategies can be complex—but it doesn’t have to be overwhelming. The advisors at PlanWell follow our proprietary Fed-Expert Financial Blueprint to deliver personalized, tax-smart solutions for federal and military families. Our planners hold the Chartered Federal Employee Benefits Consultant℠ (ChFEBC), CERTIFIED FINANCIAL PLANNER™ (CFP®), and Accredited Investment Fiduciary® (AIF®) designations—credentials that underscore our commitment to acting in your best interest.

If you’ve inherited an IRA and want to explore how QCDs can fit into your broader retirement and charitable plans, schedule a conversation with our team today.