When charitable appeals arrive for Giving Tuesday, most people turn to their checkbooks or payment cards. Some people, and the objects of their giving, would be better off making the contributions from traditional IRAs.
The best way for some people to make charitable gifts is the charitable gift distribution (QCD), also known as the charitable IRA rollover. The QCD’s tax benefits allow you either to give more money or reduce income taxes.
Not everyone benefits from making charitable gifts through a traditional IRA. For most taxpayers, a transfer from a traditional IRA to a charity is treated as though the IRS owner received a distribution and then transferred the distribution to the charity.
The amount of the distribution is included in the IRA owner’s gross income. It’s also eligible for a charitable contribution deduction, but to take advantage of the deduction the owner must itemized expenses. Few taxpayers itemize expenses now. So, for many taxpayers making a charitable contribution from a traditional IRA increases income taxes.
Taxpayers ages 70½ and older, however, can make donations from traditional IRAs using QCDs. The amount of a QCD isn’t included in the traditional IRA owner’s gross income. The trade-off is it’s not eligible for a charitable contribution deduction. The QCD is a tax-free way to distribute money from a traditional IRA.
There’s a bonus for taxpayers ages 72 and older who are taking required minimum distributions (RMDs). For them, the QCD counts toward the year’s RMD. By making a QCD you can take all or part of the RMD tax-free. (Though you can make a QCD any time after age 70½, RMDs now don’t begin until age 72.)
Making a QCD is a much smarter way to make charitable contributions than writing a check. You take money tax-free from the IRA, and the non-IRA money you might have donated to charity can pay other expenses. The only giving strategy competes with it for tax benefits is to donate appreciated investments from a taxable account.
Anyone who’s age 70½ or older, makes charitable contributions, and has a traditional IRA should use QCDs to make at least some of their charitable contributions.
To qualify as a QCD, a charitable contribution must be made directly from the traditional IRA to a charity. The IRA owner can direct the IRA custodian to make distribution directly to a charity or charities. Or the custodian can give the owner a check made out to the charity, which the owner delivers. Some custodians give IRA owners checkbooks. When a check is made payable to a charity, that also qualifies as a QCD.
There’s a potential timing problem when writing a check as a QCD. The IRA custodian might report the check as a distribution in the year the check cleared. If you write a check in late December and it doesn’t clear until early January, the custodian could report it as a distribution made in January. If the QCD was intended to be part of your RMD, you miss taking the full RMD by December 31 and be liable for penalties.
A transaction doesn’t qualify as a QCD if you take a distribution from a traditional IRA and make a contribution to charity of the same amount. The money must go directly from the IRA to charity to qualify as a QCD. When you’re taking RMDs, the first IRA distributions during the year are treated as RMDs until you take the year’s full RMD. That’s why it’s important to make QCDs first and later take any additional RMD amount as distributions.
The traditional IRA owner must be at least age 70½ on the date of the transfer from the IRA to the charity. Suppose you turn 70½ in September and had money transferred from the traditional IRA to a charity in March. That’s not a QCD; it will be treated as an ordinary distribution.
There’s a $100,000 annual limit per taxpayer (not per IRA) on QCDs. In a married couple, each spouse has a separate $100,000 limit, but you can’t share the limits or split the QCDs. If one spouse wants to make more than $100,000 of charitable donations for the year, he or she can’t use part of the other spouse’s $100,000 QCD limit. If the couple wants to have $200,000 of QCDs, each must donate $100,000 from his or her IRAs.
Even if your RMD for the year exceeds $100,000, you’re allowed only $100,000 of QCDs. Charitable contributions from a traditional IRA that exceed $100,000 in a year will be taxable distributions.
Unused portions of the $100,000 limit don’t carry forward to future years. The $100,000 is a use-it-or-lose-it amount.
The QCD can exceed your RMD for the year. If your RMD is $10,000, and you want to give $20,000 to charity, the entire $20,000 of contributions can be made from the IRA as QCDs. Only $10,000 will count as an RMD.
Only pre-tax money can be used to make a QCD. Any nondeductible contributions (after-tax money) in a traditional IRA can’t be used to make QCDs. A special rule is you can designate that only pre-tax money in the traditional IRA is used to make the QCD while after-tax money stays in the IRA.
In general, QCDs can be made only from traditional IRAs. They can be made from simplified employee pensions (SEPs) and SIMPLE IRAs only when the plan hasn’t received an employer contribution in the plan year that ends with or during the calendar year in which the charitable contribution is to be made. In other words, the SEP or SIMPLE IRA must be inactive.
Other employer plans, including 401(k)s, don’t qualify for QCDs.
Inherited IRAs can be used to make QCDs.
The IRA owner can’t receive any benefit from the donation. Even a small gift or reward from the charity makes the entire contribution ineligible for a QCD.
The basic rules for proving charitable contributions apply, so you must have a written acknowledgement from the charity stating the amount and date of the contribution. For large donations, additional proof or tax forms might be required.
Only donations to public charities qualify as QCDs. Contributions to private foundations, donor-advised funds, and other tax-exempt groups don’t qualify. A contribution from an IRA to fund a charitable gift annuity also isn’t a QCD.
The SECURE Act permits contributions to traditional IRAs after age 70½. It also prohibits an individual from combining a QCD and deductible IRA contributions after age 70½. The rules are complicated, but you generally can’t take a QCD to the extent you made a deductible contribution to a traditional IRA after age 70½.