Taking an RMD from your IRA in 2025? Don’t Forget the “First Dollars Out” Rule.

January is the “new December” for maximizing tax savings with a Qualified Charitable Distribution (QCD) from your IRA.

The old adage that “timing is everything” can apply to many things – including using your IRA’s required minimum distribution (RMD) to make a tax-smart gift to a charity that you care about, like Drexel University. The IRS is now enforcing the “first dollars out” rule, which means that the first dollars withdrawn from an IRA in a year where an RMD is due will be applied to satisfy the RMD. If all or part of your RMD is taken before you initiate a QCD to charity, that RMD amount will be taxable.

One of the key benefits of using QCDs for charitable gifts – particularly if you don’t itemize on your tax return – is that the distribution from the IRA to the charity can be applied to satisfy your RMD amount and will not be counted as taxable income. (This may reduce your adjusted gross income, or AGI, a key figure that determines the level of other tax benefits, deductions and credits.) However, if an RMD was already taken earlier in the year, a QCD initiated afterward cannot offset the RMD income. The QCD amount will still be excluded from taxable income, but the RMD already taken will be included in income.

For example, let's say that a 77-year-old needs to take an $8,000 RMD from his traditional IRA for 2025. He likes to take his RMD early in the year so that he won't forget, and he takes an $8,000 RMD in March. If, toward the end of 2025, he begins thinking about charitable contributions and would like to do a QCD, he won’t be able to recharacterize his early-year withdrawal as a QCD. Rather, because of the "first dollars out" rule, the withdrawal he took in March will count as his RMD and will affect his AGI accordingly. He can still do a QCD later that year, by steering additional funds from his account to charity, but that amount would be on top of the amount he already withdrew to satisfy his RMD. In other words, if his goal was to align his RMD with the QCD, he botched it.

Also, keep in mind: there's no "grace period" for doing a QCD. In contrast with IRA contributions, which can be made up until the tax-filing deadline (typically in mid-April in the following year), you cannot do a QCD in mid-April 2026 and expect it to count on your 2025 tax return.

A few reminders:

• QCDs are available to IRA owners and IRA beneficiaries who are 70½ or older, even though the current age for RMDs is 73.
• QCDs can only be done from IRAs, not from retirement plans such as 401k and 403b accounts. Donor advised funds and private foundations don’t qualify for QCDs either.
• The total amount of QCDs that an IRA account holder can exclude from gross income is $108,000 in 2025.
• If you don’t need the income from your RMD, a QCD is a better alternative to simply not taking it because the IRS may charge you up to a 25% penalty for not taking the year’s RMD.
• Once you have taken your RMD for the year, those funds can't be reclassified as a QCD later.

While a QCD can be done at any time throughout the year, even after all or a portion of your RMD has already been taken, doing it first will help you avoid making the mistake of taking a taxable distribution that cannot be retroactively offset with a future QCD.

Questions? Contact David Toll, JD, senior associate vice president in Drexel’s Office of Gift Planning at giftplanning@drexel.edu or (215) 895-1882.