This visual is designed to show donors why waiting until the year they have a required minimum distribution (RMD) to move their 401(k) results in an unnecessary tax bill.
You may also wish to read the associated featured article: The QCD/RMD Trap Door: Act Now Before It’s Too Late!
THE REACTIVE PATH (Falling into the Trap) – Donor waits to act until the year the RMD is due.
| Timeframe | Donor Status & Goal | Action Taken | First Dollars Out Trap | Result |
| Current Year | Status: Holds 401(k) funds. Goal: Wants to satisfy RMD tax-free via a QCD. | Requests rollover of 401(k) balance to an IRA. | 🛑 STOP 🛑 “First Dollars Out Rule” applies. You must take your taxable RMD in cash before rolling over the rest. | ❌ Taxable Income Increased Donor receives taxable cash RMD. The remaining funds move to an IRA for QCDs in future years. |
THE PROACTIVE PATH (The Tax-Free Solution) – Donor plans one year ahead.
| Timeframe | Donor Status & Goal | Action Taken | First Dollars Out Trap | Result |
| YEAR 1: The “Setup” Year (Before Dec 31) | Status: Holds 401(k) funds. Goal: Prepare for future tax-free giving. | Completes a full, tax-free rollover from 401(k) to an IRA. | ✅ GO ✅ After the current year RMD is taken, rollover proceeds smoothly. | Funds are successfully housed in an IRA before the year ends. |
| YEAR 2: The “Giving” Year (Starting Jan 1) | Status: Holds IRA funds. Goal: Satisfy new year’s RMD tax-free. | Donor directs IRA custodian to send a QCD directly to charity. | ✅ GO ✅ Funds are coming from an IRA. The distribution counts toward the RMD. | ✅ Zero Tax Liability ✅ RMD is satisfied without increasing taxable income. |
