The Tax Break Most Washington Public Employees Miss
By Seth Deal, CPA/PFS
Tom, a retired firefighter, discovered something that made his stomach drop when reviewing his tax situation.
At 73, Tom was required to take $25,000 from his traditional IRA. He also donated his usual $8,000 to the food bank where he volunteers. He handled both transactions the way most people do—took his RMD as income, then wrote a separate check to charity.
The result? Tom paid $1,900 in federal taxes on money he gave away, plus faced higher Medicare premiums due to the increased income.
All because he didn't know about the three letters that could have saved him $1,900+: QCD.
If you're a Washington State DRS member over 70 ½ with a traditional IRA, you're sitting on one of the most powerful tax strategies in the code. Yet many retirees never learn about Qualified Charitable Distributions until it's too late to maximize the benefit.
The QCD Rules Every DRS Retiree Must Master
1. The Magic Number Unlocks Everything - Once you reach age 70 ½, you can send money directly from your traditional IRA to qualified charities¹. This counts toward your Required Minimum Distribution but never touches your tax return as income.
2. It's Not Just About Federal Taxes - In Washington State, every dollar of federal tax savings goes directly to your pocket². But QCDs also reduce your Adjusted Gross Income, triggering cascading consequences.
3. The $108,000 Annual Limit (2025) Per Person - You can donate up to $108,000 annually via QCD³. Married couples filing jointly can each do $108,000 from their respective IRAs—that's $216,000 in tax-free charitable giving power.
4. It Must Go Direct From IRA to Charity - The money cannot touch your bank account⁴. Your IRA custodian must send the check directly to the qualified charity, or you lose the tax benefits entirely.
Your "Stealth Income Reduction" Strategy
Step 1: Calculate Your RMD Tax Damage
Here's the math most retirees ignore until December.
Real scenario: Captain Sarah, age 73, has $850,000 in her traditional IRA. Her RMD this year: $34,600. At the 22% tax bracket, that's $7,612 in federal taxes she can't avoid.
But Sarah donates $12,000 annually to local charities. Using the QCD strategy, she can eliminate taxes on $12,000 of her RMD.
Her tax savings: $2,640 in federal taxes alone.
The cascade effect beyond basic tax savings:
- Federal tax reduction: $2,640
- Lower Medicare Part B and Part D premiums based on reduced AGI
- Reduced taxes on Social Security benefits
Your homework: Calculate your current RMD and multiply by your tax rate. That's your baseline cost of doing nothing.
Step 2: Audit Your Charitable Giving Pattern
Most retirees give the same amount to the same organizations every year. That's actually perfect for QCD optimization.
The QCD advantage: Instead of writing checks from your bank account (using after-tax dollars) and itemizing deductions (assuming you are over the standard deduction), send the money directly from your IRA.
Why this works: You get the same charitable impact but eliminate the income that would have triggered taxes and Medicare premium increases.
Example breakdown:
- Traditional way: Take $10,000 RMD (pay $2,200 tax), donate $10,000 from checking
- QCD way: Send $10,000 directly from IRA to charity
- Net difference: $2,200 stays in your pocket
Step 3: Master the "Split Strategy"
Here's where it gets sophisticated.
You don't have to make your entire RMD a charitable distribution. You can split it strategically based on your charitable giving goals and tax situation.
Advanced scenario: Mike, age 74, has a $40,000 RMD but only donates $15,000 annually.
His split strategy:
- $15,000 QCD to his regular charities (tax-free)
- $25,000 regular distribution to cover living expenses (taxable)
The math:
- Federal taxes on $25,000 instead of $40,000: $3,300 savings (22% tax bracket)
- Potential Medicare premium reductions based on lower AGI
- Total annual benefit: $3,300+ depending on income level
Don't let another year pass where you're paying unnecessary taxes on money you're giving away anyway. The QCD strategy is one of the few ways to reduce your taxable income in retirement while supporting causes you care about.
This works best when coordinated with your overall retirement income strategy, Social Security timing, and Medicare planning.
Bottom line: If you're over 70½ and donate to charity, QCDs can save you thousands annually while supporting the same causes.
If you’re concerned about your current financial plan and would like to explore the possibility of professional help, consider reaching out.
I specialize in helping Washington Public employees who are nearing retirement or are retired, reduce taxes, maximize pensions, and retire stress-free.
We offer a Free Financial Review, answering your big questions and showing you exactly how we can help, so you can make an informed decision about hiring us.
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No sales pressure. No obligations. Just professional guidance to help you make the best decision for your financial future.
-Seth Deal
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