This visual is designed to show donors why waiting until the year they have an required minimum distribution (RMD) to move their 401(k) results in an unnecessary tax bill.
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. |
