Executive Summary
For nearly a decade, the rules allowing for a tax-free Qualified Charitable Distribution (QCD) directly from an IRA to a charity has been on-again, off-again, a part of the infamous Tax Extenders that would lapse and be reinstated every other year.
With the Protecting Americans from Tax Hikes (PATH) Act of 2015, though, the QCD rules have finally been made permanent, making it easier to engage in proactive charitable giving strategies that help to minimize the tax bite of an IRA’s Required Minimum Distribution (RMD) obligations.
However, obtaining the tax benefits for doing a QCD from an IRA to a charity requires meeting very specific requirements, including a minimum age limitation, a maximum dollar amount limitation, and contributing to only certain types of eligible (public) charities (rendering private foundations, donor-advised funds, and split-interest charitable trusts all ineligible).
In addition, there is the most stringent requirement – though also the easiest to satisfy – that for an IRA distribution to qualify as a QCD, the check cannot be made payable to the IRA owner and instead must be made payable directly to the charitable entity (though the check payable to the charity can be sent to the IRA owner and forwarded on to the charity).
Fortunately, though, with QCDs made permanent under current law, at least IRA owners have the entire year to strategize and decide whether to engage in charitable giving – but remember that once an RMD has been distributed, there’s no way to undo it and turn it into a QCD later!
Permanence Of The QCD Rules After The PATH Act Of 2015
The rules permitting a “Qualified Charitable Distribution” (QCD) from an IRA were first created under Section 1201 of the Pension Protection Act of 2006. However, the biggest planning challenge faced by the immediately-popular provision was that the original rule was only effective for two years – 2006 and 2007 – beyond which the QCD rules lapsed.
In 2008, the QCD rules were reinstated and extended through 2009 (under the Emergency Economic Stabilization Act of 2008, also known as the TARP legislation signed into law during the financial crisis), only to lapse again after 2009. QCDs were in turn brought back again for 2010 and 2011 under the fiscal cliff legislation at the end of 2010, though they were reinstated only 2 weeks before the end of the year, leaving little time for anyone to actually make a QCD (necessitating Congress to provide taxpayers a one-month extension into January of 2011 to make their 2010 QCDs!). And sadly, this pattern was repeated again 2012, when QCDs were lapsed for the entire year and then retroactively reinstated for 2012 (and extended into 2013) with the second fiscal cliff legislation, once again prompting Congress to provide a temporary extension for 2012 QCDs into early 2013.
And sure enough, continuing the pattern once more, Qualified Charitable Distributions from IRAs were lapsed for the majority of 2014 as well, only to be retroactively reinstated in mid-December after it was already too late for many who had grown impatient and already taken their RMDs and/or done their charitable giving for the year! And in 2015 the process repeated once more, with QCDs retroactively reinstated again in mid-December under the Protecting Americans from Tax Hikes (PATH) Act of 2015.
Fortunately, though, the key change that occurred with the PATH Act of 2015 is that QCDs were not only retroactively reinstated for 2015 and extended, but they were finally made permanent. As a result, qualified charitable distributions in 2015 and beyond no longer face the ongoing threat of lapse, or the challenge of trying to figure out whether they should be done early in the year in anticipation of retroactive reinstatement later.
Instead, QCDs are now a permanent element of the tax law, and likely to remain in place for the foreseeable future, which allows for proactively tax planning opportunities… at least, assuming all the requirements are met!
Requirements For Qualified Charitable Distributions From An IRA
The core requirements for making Qualified Charitable Distributions (QCDs) from an IRA to a charity are contained in IRC Section 408(d)(8) (as created under Section 1201 of the Pension Protection Act of 2006).
Under the QCD rules, the IRA owner must be at least age 70 ½ to do the QCD to the charity (and notably, the IRA owner must actually be age 70 ½ or older on the date of distribution, not merely turning 70 ½ sometime that year). Under IRS Notice 2007-7, Q&A-37, even a beneficiary of an inherited IRA can be eligible for a QCD, as long as the beneficiary themselves is at least age 70 ½ on the date of the distribution.
The maximum dollar amount of a QCD for any individual from his/her IRAs is limited to $100,000 per year. For QCDs, this annual limitation is done on a “per-taxpayer” basis (across any/all of the individual’s IRAs, regardless of how many accounts are used to generate the charitable distribution), though as a per-taxpayer limitation a married couple can each do up to $100,000 (as long as each taxpayer’s QCDs come from his/her respective IRA).
Only distributions from an individual IRA (including a rollover IRA) are eligible, and not from a SEP or SIMPLE IRA (if they are still "active" and receiving ongoing employer contributions), nor from any type of employer retirement plan. Notably, a QCD is permitted from a Roth IRA as well, though most distributions from a Roth IRA are already tax-free and therefore QCD rules wouldn’t be relevant anyway (as described further below).
To qualify for QCD treatment, the rules also stipulate that the distribution must go to a public charity (as described in IRC Section 170(b)(1)(A)), and thus cannot go to a private foundation, nor (as specified in the tax code) may a QCD go to a charitable supporting organization or a donor-advised fund, either.
In addition, the charitable distribution from the IRA must be one that otherwise would have been eligible for a full charitable deduction under IRC Section 170 (even though QCDs are not eligible for a deduction, as discussed below). This “must have been eligible for a full deduction” rule ensures that the IRA donor does not receive any kickbacks or other “quid pro quo” benefits for the donation (which would limit the donor’s deduction to only the net amount contributed and fail the “full deduction” QCD requirement). This requirement also prevents any “split-interest charitable trust” (e.g., a charitable remainder trust or a charitable lead trust) from being an eligible QCD beneficiary.
End Of Year Deadline For IRA Charitable Contributions
In order to receive favorable treatment for a QCD in the current tax year - including having the RMD satisfied for the current tax year, and falling under the current year's maximum QCD contribution limit - the charity should ideally cash the QCD check by December 31st. In practice, this means beginning the process to complete the QCD by mid-December, as most IRA custodians will insist that the check be payable to the charity but still mail it to the IRA owner first (who must then forward it on to the charity); to get the check payable to and sent directly to the charity will in most cases require a Medallion guarantee (a similar but more stringent process than getting a signature notarized), which usually has to be mailed in once completed (creating even further delays).
Notably, there is still some debate about what exactly constitutes a completed donation in the case of a QCD in order to meet the end-of-year deadline. Some have suggested that the charity merely needs to receive the check by December 31st - such that the charity is in constructive receipt of the distribution - even if the check isn't cashed until after the end of the year. And Treasury Regulation 1.170A-1(b) stipulates that when a normal (non-IRA-related) check contribution is made to a charity, the date that the check is mailed is sufficient (even if not received by the charity until after the end of the year); in theory, this might be applied for a direct distribution of the charitable distribution from the IRA to the charity (if a Medallion signature is obtained) based on the date that the IRA custodian cuts the check.
However, these interpretations have never been applied directly to evaluate the deadline for making an IRA charitable distribution, so ideally the check itself should be deposited by the charity by December 31st - and clearly shown as a completed distribution on the end-of-year IRA statement - to ensure credit in the proper tax year.
Benefits Of Doing A QCD From An IRA
The benefit of doing a QCD from an IRA is that the distribution comes out of the IRA without any of the tax consequences that would otherwise apply to a withdrawal (i.e., it is excluded from income altogether). Notably, there is no charitable deduction for making the QCD contribution to the charity, but only because by definition it was already entirely pre-tax (having come directly from a pre-tax IRA).
In addition, to the extent that the IRA owner had a Required Minimum Distribution (RMD) obligation for the year, the QCD is deemed to satisfy the RMD, even though the QCD is not taxable as an RMD otherwise would have been. And since an IRA owner must be age 70 ½ in order to do the QCD, by definition he/she will also have at least some RMD due for that tax year as well!
Example 1a. Harold just turned 71 years old and has an IRA with a $152,000 account balance. His RMD for the current year is $5,736. If Harold does a $5,000 QCD to his favorite charity, it will satisfy $5,000 of his RMD obligation (without any tax liability), leaving him with only another $736 to distribute (and report in income for tax purposes).
Example 1b. Continuing the prior example, if Harold instead did a $6,000 QCD from his IRA to a qualifying charity, his entire RMD will be satisfied (as his QCD is more than enough to cover the RMD obligation), and again there will be no tax consequences to the entire QCD (assuming it was otherwise eligible).
One important caveat of using a QCD to satisfy an RMD obligation, though, is that an RMD is presumed to be satisfied by the first distribution that comes out of the IRA for the year. And because IRC Section 408(d)(3)(E) does not permit an RMD to be rolled over back into an(other) IRA, once an RMD occurs, it is irrevocably distributed (and taxable).
Example 2. Chuck had a $7,400 RMD obligation for the current 2016 tax year. In February, he took a $7,400 to satisfy his entire RMD. In March, Chuck realizes that it may have been better for him to do a QCD instead, as he was planning to contribute to charity later in the year anyway. However, even if Chuck now does a QCD, it cannot be applied towards his RMD (which was already satisfied), nor can he undo his prior RMD (which is irrevocable once distributed). At best, Chuck can simply take the $7,400 distribution he took from his IRA, donate it to a charity, and claim a $7,400 charitable deduction as an itemized deduction on Schedule A, and hope that it at least mostly offsets his prior taxable distribution.
In the context of a Roth IRA, a QCD is generally a moot point, because a distribution from a Roth IRA is typically already tax-free (either as a return of principal, or as a tax-free qualified distribution of growth), especially for someone who is already age 70 ½ (and therefore has likely had the Roth for more than the requisite 5-year period). Nonetheless, to the extent that a distribution from a Roth IRA would actually be a non-qualified (i.e., taxable) distribution (e.g., because it’s a distribution of Roth IRA growth and the 5-year rule has not been satisfied), it can be treated as a QCD if made directly to a charity.
Notably, while there are clear tax benefits to doing a QCD from an IRA, in some situations it can be even more beneficial to take an RMD and offset the income by donating appreciated securities instead (which obtains a charitable tax deduction and permanently avoids the capital gains taxes!).
Pre-Tax And After-Tax Ordering Rules For QCDs
While a QCD is normally treated as a direct pre-tax contribution from an IRA to a charity, additional “ordering rules” are necessary to determine the tax consequences of a QCD when the available pre-tax IRA(s) include after-tax (non-deductible) contributions. (A Roth IRA would follow the normal Roth distribution ordering rules under IRC Section 408A.)
The good news is that the ordering rules of IRC Section 408(d)(8)(D) explicitly require that any qualified charitable distribution from an IRA is deemed to come from the taxable portion of the account first (as opposed to the ‘typical’ pro-rata rule), which actually helps to ensure the most favorable treatment. In addition, all IRA accounts are aggregated together to determine the total taxable amount that is potentially eligible for a (pre-tax) qualified charitable distribution.
Example 3a. Jeremy has two IRAs. The first is the account to which he’s made ongoing contributions for years, and it currently has a total of $21,000, of which $15,000 is after-tax (non-deductible) contributions. The second is a $158,000 rollover IRA of his prior 401(k) plan. If Jeremy were to take a $10,000 distribution from either IRA, then under the IRA aggregation rule the total non-deductible contributions are $15,000, the total IRAs are $179,000, and the IRA distribution would be $15,000 / $179,000 = 8.4% non-taxable and 91.6% taxable. However, if Jeremy does a Qualified Charitable Distribution instead, the funds are deemed to come from pre-tax dollars first. Thus, even if he does the $10,000 QCD from the $21,000 IRA (which was $15,000 of after-tax and $6,000 of growth), the distribution is treated as being entirely pre-tax and eligible for QCD treatment, because the IRA aggregation rule treats all the IRA accounts as one collective account, regardless of where the after-tax contributions were actually made.
Notably, to the extent that a QCD uses up all the available pre-tax funds from all accounts, and only after-tax dollars remain available, a QCD of after-tax dollars from an IRA will be eligible for a charitable deduction, as though the after-tax funds were simply withdrawn in a non-taxable distribution and subsequently donated directly to the charity.
Example 3b. Continuing the prior example, if Jeremy’s only IRA were the $21,000 account with $15,000 of after-tax contributions, and he did a $10,000 direct distribution to a charity, the first $6,000 would be treated as a QCD (not taxable, nor eligible for any charitable deduction), and the last $4,000 would be eligible for a charitable deduction on Schedule A (as though the last $4,000 was taken as a non-taxable distribution of after-tax dollars, and separately contributed to the charity).
How To Do A Qualified Charitable Distribution (QCD)
To complete a qualified charitable distribution (QCD) from an IRA to a charity, the IRA owner must:
- Already be age 70 ½ on the date of distribution
- Submit a distribution form to the IRA custodian, requesting that the check be made payable directly to the charity
- Ensure that no tax withholding is being done from the QCD to the charity (as the money must actually go to the charity to qualify, and as a non-taxable distribution no withholding should be necessary)
- Send the check directly to the charity, or to the IRA owner to be forwarded along to the charity
While the process of completing a QCD to a charity is fairly straightforward, the key administrative requirement is that the distribution check must be made payable directly to the charitable entity. If the funds go to the IRA owner and are then passed along to the charity, it is still a taxable distribution to the IRA owner and not a QCD.
Under IRS Notice 2007-7, Q&A-41, it is permitted for the check to be mailed to the IRA owner, as long as the check is payable to the charity, but a check payable to the IRA owner that is merely endorsed over to the charity does not satisfy the QCD requirements.
So what do you think? Do you recommend qualified charitable distributions to clients as a way to satisfy their RMD obligations or otherwise fulfill charitable giving? What questions or problems have arisen? Please share your thoughts in the comments below!
Good article Michael. However, you left out an important part of the QCD process – how an IRA owner reports the QCD on his/her income tax return. The IRA custodian will issue a 1099-R to the IRA owner showing the distribution as fully taxable. The IRA owner must show the distribution on line 15a of the 1040, then show only the taxable amount (if any) on line 15b, and indicate it as a QCD. Many tax preparers and IRA owners think that the 1099-R will show the QCD as nontaxable, which is not true. In addition to having to show the QCD on the tax return, the IRA owner should be prepared to prove to the IRS that the money was indeed paid directly to the charity, and that the charity is qualified under the rules.
You are right on in your concern on how this gets reported. RMD’s are shown on a 1099R as a taxable distribution and I have yet to find an accountant or tax person that can clarify how this gets reported on a tax return without creating some confusion for the IRS. Example: My client takes a $30k RMD throughout 2016, of which $10k goes directly to a charity (check made out to the charity and sent directly to the charity). His 1099R will show a taxable distribution of $30k with no clarification or information regarding the $10k that went directly to the charity. My concern is twofold: 1) How to make sure that the tax preparer only includes $20k in taxable income, and 2) How will the IRS interpret a different taxable amount on the tax return versus the 1099R. There has to be something that resolves this reporting and processing challenge; and does anybody know?
If filing a paper return, line 15a (gross IRA distribution amount) would be $30,000, line 15b (taxable amount) would be $20,000. Write the letters QCD in the blank space next to line 15b.
This is the same process that is used for rollovers (write the word rollover in the blank space next to line 15b).
I don’t know about other tax software, but TurboTax will do it this way if you enter the proper information.
As far as the IRS being confused, well, that happens, but these are the IRS instructions.
On a previous return, prepared with H&R Bock software, line 15a was marked as a QCD, yet I received a bill from the IRS for the tax. It took me a while to discover what happened, but in the end I wrote to the IRS that the distribution was a QCD and line 15a was properly marked. I never heard back from them.
I’ve recommended it to charitably inclined clients as a way to reduce MAGI so their monthly Part B premium amount and prescription drug coverage is reduced-to some success-but I’m hearing rumblings that instead of having 5 brackets, the next legislation will try for more brackets as a way to increase premiums.
I’ll add some more tidbits.
1) It’s usually better to do custodian mailing direct to charity than to make a check out to the charity and send to owner for them forward.
2) Problem: If from custodian there is usually no way for the charity to know who it came from which can bother some individuals and…
3) While the distribution code and materials at custodian should be enough if audited, you conceivably would want the charity to actually have record of donation coming from you for more evidence and.
4) Some charities send receipts or other evidence of contribution to donor after receipt. Therefore…
**On the IRA distribution form add the clients name to the memo line section so the charity knows who its from.**
I’m a bit confused. Why is it “usually better to do custodian mailing direct to charity…”?
Maybe I shouldn’t be so broad since this is custodian specific.
Schwab sends letters to client and charity for additional evidence of contribution if you send direct. They don’t do that if they send check to client.
Per Publication 590-B, “Distributions from IRAs”, and specifically regarding QCDs:
“Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for a charitable contribution.”
So the charity better know why the custodian sent them a check, and should give you an acknowledgement!
How is this better than making the donation directly to the charity, then taking the charitable deduction?
If one takes the standard deduction, there is no charitable deduction.
That is only 1 of about a dozen reasons actually.
You’re comparing a super above the line deduction to an itemized deduction with a lot of things tied to AGI.
Read the above article with the explanation.
Thanks for the excellent article. I’d like to comment with regard to (1) a donor making a late year gift; and (2) donor that has check writing privileges.
First issue: If a donor makes a late year gift and the check is not cashed by the charity by December 31 some plan administrators will not count the gift towards the current year RMD and will not report it on Form 1099-R for the current year. Donor could end up with a large under distribution penalty.
Second issue: I believe this applies to donors that have check writing privileges but I can’t be sure. Perhaps Michael can comment on this because I’d be interested to know if this is the case. This is an excerpt from IRS Notice 2007-7, which answers various questions about rollovers and other distributions, including qualified charitable distributions under IRC 408(d)(8):
“Q-41. Is a check from an IRA made payable to a charitable organization described in § 408(d)(8) and delivered by the IRA owner to the charitable organization a direct payment to such organization?
A-41. Yes. If a check from an IRA is made payable to a charitable organization described in § 408(d)(8) and delivered by the IRA owner to the charitable organization, the payment to the charitable organization will be considered a direct payment by the IRA trustee to the charitable organization for purposes of § 408(d)(8)(B)(i).”
I have usually found that contributing appreciated shares of stock/mutual funds is better for my clients. For one, you get the double tax benefit of No Tax on Capital Gains + Itemized Deduction. And secondly, it’s a chance to change a portfolio without as much of the tax headache.
For a client that is over 70.5 with a 401k is there any way for him to take advantage of the QDC for 2016? If he rolls over into an IRA – I think the 401K custodian will required RMD be taken 1st – however QDCs are not available for 401Ks as I understand it – Is there any workaround? Thanks!!
Has to be from an IRA.
1. Can grandparents make a charitable-contribution-from-ira (RMD) to a Boy Scouts troop?
2. Can it be used for dues?
Thanks!
Unlikely, unless they are set up as a charitable institution. Dues? Never.
Other benefit of the QCD (compared to taking distribution outright and then donating to charity) is that it potentially reduces the amount of social security which is taxable. Also, keeps AGI lower for other purposes such as Roth IRA eligibility, Medicare premiums, etc.
It would seem that they main benefit of a QCD is that it reduces ones Adjusted Gross Income. If so, it would be helpful if the article talked about when, and to whom, reducing ones AGI is important enough to go through the hassle of a QCD.
Assume for 2016, you have an RMD obligation of $10k and your broker sends $4K to charities directly
. No problem. Early next year your broker sends you the 1099 indicating you took the total RMD of $10k. BUT, how do you indicate on page 1 of your 2016 1040 form that $4k of the $10k is tax free?
Write QCD = 4,000. In 15b, write 6,000.
Can a QCD be made from an IRA that is a SEP that has not received any new contributions many years? He is 78 and would like to donate a portion of his GAWA to charity. Any advice would be appreciated.
In the case of Chuck (Example 2.), would anything stop Chuck from donating additional money, beyond that which he already took for his RMD, to a qualified charity through a charitable distribution (albeit not to supplant his RMD)? Seems like it would still be a tax-wise way to make an additional charitable gift as it wouldn’t be considered income.
Nothing to stop him, beyond the overall $100,000 limit.
The QCD rules aren’t “a way to make an RMD”. They’re “a way to make a contribution of up to $100,000” that ALSO happens to satisfy the RMD requirements.
Bear in mind that for additional contributions, though, donating appreciated securities should also be evaluated, as it can sometimes be better. See https://www.kitces.com/blog/ira-qualified-charitable-distribution-qcd-to-satisfy-rmd-vs-donating-appreciated-securities/ for further detail.
– Michael
John’s IRA is self directed and held at a bank. The RMD has been transferred to a separate, standard account at same bank. Can that RMD be used as a QCD if the bank cuts the check?
Nope. Once distributed, it’s income to you.
Can you donate a RMD to charity & then list it in your itemized charitable distributions as a deduction? If so, won’t this be doubling the charity value of your distribution? If not, then there is no advantage to donate the RMD as long as your total deductions exceeds the minimum the deduction that you can take.
Leon,
If you donate the RMD to charity directly as a QCD, it cannot be deducted, because you already claimed it as a QCD.
If you TAKE the RMD, and report it as taxable income, THEN you can claim the subsequent donation of that money as a charitable deduction.
So if you claim the distribution as $0 (QCD), the deduction is $0. If you claim the distribution as $10,000 taxable (or whatever amount), you can deduct all $10,000 by donating it.
In practice, distributing and donating isn’t always a perfect wash, though, even if itemized deductions exceed the standard deduction. The reason is that the RMD income is above-the-line, and the deduction is below-the-line. So the RMD increases AGI, which can increase taxability of Social Security, increase Medicare premiums, phase out itemized deductions, or adversely impact the deduction threshold for medical expense or miscellaneous itemized deductions – none of which is offset when you subsequently claim the deduction.
This is why, as noted in the article, a QCD is slightly better than just taking the RMD and donating it for the charitable deduction. Not a massive difference, but usually at least a modest one.
– Michael
In regards to example 3a – what if Jeremy did not rollover his 401(k) to the rollover IRA? How would this impact him? Is this essentially the same as example 3b? Thank you for the additional insight.
I made 2 contributions from my IRA to charities. Checks were mailed directly. However I received from my broker, a form 1099R showing the entire amount of the RMD as if I had received it. What form should they have sent me?
You need to ask for a revised 1099R.
Bank or broker will send a 1099R showing entire RMD. Write this for line 15a of Form 1040. Then, above line 15, you write QCD and the amount you had sent to charity. Write your net income on line 15b. (Total – QCD = net income.)
A donor has recently made a QCD to a hospital foundation that is categorized as a supporting organization instead of the hospital, which is the qualified charitable organization. What is the best course of action to ensure that our donor receives the benefit that he intended?
Make your intent clear to the recipient with the understanding that future gifts will depend on your instructions being followed. Ask for a report at the end of the year.
Related to this, what is the logic that a QCD cannot be made to a supporting organization in the first place?
The statutory basis for that claim seems misstated in the article. The statutory exceptions included 509(a)(3) organizations, which are supporting organizations.
I believe there is another benefit from doing an QCD relating to Social Security. To the extent the QCD is not taxable it is reported on line 15b. of the 1040. As such it is excludable as “income” from considering the taxable amount of SS income that comes forward to line 20b. You will notice that otherwise, any income that is taxable, also drags along a portion of SS benefits as taxable as well.
What is the MINIMUM QCD that can be made from the RMD in a pension fund? If a client can only afford a $1000 QCD, is that acceptable? And can that thousand dollars be split in to two or more charities, or must it all to only one?
Had a case with $200. So $1,000 is fine.
How is a QCD shown on the federal income tax form? One receives a form from VG showing that the correct RMD has been distributed, but there is nothing to show that part of it is a QCD (with no tax taken out). Which Federal Tax line would one use to show why only the non-charitable distribution part of the RMD has been taxed, as correctly done by VG.
I’m not sure what the correct procedure is, but the clearer you make it to the IRS the better to avoid a time consuming audit. This year I attached the 1099-R form to a sheet of paper which contained the information below (figures not actual–just for illustration):
The 1099-R (above) shows Gross distribution of $15,000, and the taxable amount of $15,000. However, the taxable amount shown does not reflect the fact that qualified charitable donations (QCDs) were made directly via withdrawals from the IRA checking account of Mr. Smith (i.e, your name).
The total of the QCDs is $5,000. (list of checks below; attached are copies of the cancelled checks* and letters of acknowledgement from the various charitable organizations).
So the correct information would show:
Gross distribution of $15,000, as shown–to Form 1040, line 15a
Taxable amount: $10,000 ($15,000 minus $5,000)–to Form 1040 line 15b
*You should be able to get these copies either by requesting from your financial institution, or as I do by going to the “history” section of my account where there is a photo of the check that I can copy onto an Excel spreadsheet or a WORD document.
Can a 401k be rolled over to an IRA and do a QCD in the same year to satisfy the original RMD on the 401k, or does the IRA have to be established by 12/31 of year prior to do the QCD?
If the 401(k) exists with a balance when the ball drops on New Year’s Eve, and it’s an RMD year, then that 401(k) has an RMD that has to come from that account. Can’t roll the money to an IRA and QCD/RMD from there; technically the RMD amount in the 401(k) isn’t even eligible TO rollover, because it HAS to come out.
Would need to establish the IRA prior to 12/31 of year prior to QCD the RMD for the subsequent year.
– Michael
Thanks Michael! That confirmed my suspicion.
Sivertsen’s question and Michael’s answer fit my situation exactly. The moral I take from this is: start doing your research by at least age 69 so that you have moved 401 monies into a rollover IRA from which you can then draw monies for the QCD. I turn 70 1/2 in May; I should have done the rollover in the previous calendar year BEFORE the RMD amount was “set” (not just distributable as late as April 1, 2018). My Ooops!
Re the reporting aspect, how is a QCD that is partly non-deductable reported?
can you give stock from IRA to satisfy the RMD and thus avoid brokerage fees?
I took MRD’s from 2 IRA’s at age 70 2 weeks ago. I have much larger MRD due from an SEP, from which I had planned for a QCD at age 70.5 later in the year. Is this permitted??
Read Michael’s report. Only IRA, not SEP.
Can an individual gift securities from an IRA directly to charity or does the check rule require it to be in cash? I had a client retitle a REIT share in the name of the charity as it was originally housed in the IRA…
Yes. No.
When reporting the QCD on 1040 Line 15b, Turbotax generates an “Explanation Statement which shows to what Charitable Organization the entire Distribution was remitted to. Does this explanation statement need to be included with the return?
Another benefit of a QCD is that since it does not count as a taxable distribution (income) it does not “drag” along with it $850/$1000 of taxable social security income. This reduces the proportion of SS income that is non-taxable and reduces overall tax liability – even though you don’t get a charitable deduction – it’s almost as good as [so long as your “income” is not high enough to max your taxable SS at the 85% of SS income rate.
If your income is low enough to be close to the taxable limit of SS, you are probably not considering donating your IRA income to charity.
I think there is another key benefit that has been overlooked and that is that since a QCD is not considered income, it then doesn’t drag Social Security income from the non-taxed category into the taxed category (based on income limits).
Thank you for this, Michael. Do the QCD rules apply to an inherited IRA where the IRA beneficiary is over 70-1/2?
Thank you for the in-depth analysis. Very helpful. I think I know the answer to this, but I want to put it out there: Client is over 70.5 and funds are still in a 403b. He has made a sizable pledge to an endowment and had planned to do QCD. However, he can’t do it from a 403b, and he can’t roll the funds to an IRA without the 403b custodian issuing a check for the RMD. The custodian says they can ONLY cut the check to the client for the RMD. So, are we stuck? I am weighing whether it make sense to do the rollover anyway, take the contribution as a deduction this year, and do QCDs going forward. His pledge comes to just under $100k / year for five years. Any ideas?
Never mind – I found the answer in other comments below. I don’t like the answer, but there it is.
Can a person designate a charity as a beneficiary in his/her Rollover IRA?
Are we allowed to designate a charity as a beneficiary in a Rollover IRA?
My mother was told by her CPA that there was a ruling that you can no longer do a qualified charitable distribution from an inherited IRA. I could not locate any info on it. Does anyone have a link to this ruling?
Thanks.
This posting on Fidelity’s website seems to indicate yes, you can use a QCD as a distribution from an inherited IRA. https://www.fidelity.com/learning-center/personal-finance/retirement/qcds-the-basics although it looks like you must still be 70.5 yrs old before you can request it.
Does a QCD reduce the “basis” in non-deductible funds in the IRA? In other words, can this be used to simply future year Form 8606 filings?
Quite the opposite. QCDs come solely from the taxable portion of the IRA (gains plus pre-tax contributions). When you run out of taxable money in the IRA, you can’t make QCDs.
So, your non-deductible basis continues to exist and you get to continue to file 8606s.
I will be 70 in April 2018. I will want to start taking partial RMDs from January – April 2018. Can I then initiate the QCD in October after I turn 70.5? Then in December will take the rest of the RMD.
Can I do a partial RMD before I turn 70.5 and the rest after I turn 70.5, which then will include the QCD?
I will turn 70 in April 2018. Can I take 1/2 of my RMD then and the rest in October along with the QCD after I turn 70.5?
Michael,
I understand that you can not complete a QCD from a SIMPLE IRA. I also understand that you can aggregate IRAs (Traditional and SIMPLE) to meet RMD requirements. Therefore, can you complete a QCD from a Traditional IRA in an amount that both satisfies the RMD requirements for the Traditional and the SIMPLE?
Thank you,
Andrea Bulen
Does an IRA owner need to include some sort of letter to the charity when they forward the check that their IRA custodian mailed to them? If so, what should this letter say? Thank you!
On the QDC Charitable Distribution Form there is a section 3 that talks about taxes. It asks Withhold State Tax what do I put in that space?
Bob
The whole point of QCDs is that the distribution is excluded from income. There’s no reason to do any state tax withholding. (And if you did, the withheld amount would BECOME taxable, because it didn’t go to a charity, it went to the State!)
– Michael
The paragraph looks like this :
[ ] Withhold Federal Income Tax (must be 10% or greater) as follows: ______% or $_____
Withhold State Tax (check one) [ ] CA state $____ [ ] OR state $____ [ ] AZ state $____
[ ] CO state $____ [ ] ID state $____ [ ] ME state $____
[ ] WI state $____ [ ] No state withholding
Must the charitable be issued by only by check payable to charity or can the amount be wired from Ira account directly to the charity?
No specific requirement for a check. If can be a direct wire from the IRA to the charity. As long as it actually goes direct!
– Michael
If required amount is $20k and donate $5k do you still have to pay tax on remaining $15k
This is potentially a great deal for any 70 1/2 person with IRA’s who normally contributes to charities [churches or other houses of worship] to make fully deductible contributions regardless of itemization. Just disburse planned contribution(s) via QCD and then can adjust ‘weekly envelope giving’ accordingly. I will use myself in about seven years.
I have an IRA in a brokerage account, and the IRA custodian gave me a checking account for my IRA in the brokerage account. If I write a check (on my IRA brokerage account) and it is payable to a qualified charity, do you think it will pass the QCD rules?
Can I contribute 60% of my AGI directly to a 501c3 and deduct that as a charitable contribution on Schedule A and still contribute an additional $100,000 as QCD?
Client took $2k QCD this year at age 70 1/2. Then took $100k RMD (completing remainder of full RMD) later in year. Client now wishes to make another QCD. I assume this QCD cannot count toward the RMD previously taken, and that the only reduction in the taxable RMD is the initial $2k QCD? Thanks.
It’s now too late for 2019, but…
You have an RMD of, say, $95k. You have charities you want to support via QCDs. Sum of QCDs must be less than or equal to $100k per year. Sum of regular distributions plus QCDs must equal or exceed $95k.
So, if the client is willing (and the has the money in the IRAs), he can have $50k in QCDs and $75k in regular distributions; in this case he will have exceeded his RMD by $30k (50+75=125, 30 more than 95).
There’s no way to recharacterize an IRA withdrawal, so if the client wants to do QCDs and minimize his regular distributions that’s taxable, he should figure out how much his QCDs are likely to be (and execute them timely) BEFORE he initiates a regular distribution for the remainder of his RMD.
Lastly, the IRS hasn’t given any formal guidance that I’ve seen on when a QCD is considered ‘paid’. Most conservatively, you should allow plenty of time for the check from the trustee to get prepared, most likely mailed to you, remailed to the charity by you and then deposited by the charity.
Can a traditional IRA account owner 701/2 or older who has a dedicated IRA checking account at a financial institution write and sign a check to a 501(c)(3) charity and have it count as a QCD or does the check have to be signed by the IRA trustee or custodian? Please provide IRS citation allowing same or disallowing same.
Can I do more than one QCD per year?
I really want to make monthly QCDs to my church. From the article, I believe I have to satisfy the RMD with the first QCD so I might have to wait the first QCD until later in the year i.e. the first QCD might be in the third or fourth month of the year and equal three or four monthly installments. Make sense?
You can make multiple QCDs if your trustee is OK with the practice; they may want to limit the number of distributions to a given charity or place a lower limit on how much you can distribute at a time.
Your QCDs are not limited to your RMD; you can give up to $100,000 per year.
If $10,000 is sent to qualified organization directly from IRA, and $150 of that amount is not tax deductible, can I still deduct all but $150 of the $10,000 check from AGI? (Assuming all required recordkeeping)
All explained well except how do I file on my tax form? The distribution shows up in Box 7 as a distribution so how do I show it as a QCD?
Great article! I have a donor who confirmed that his IRA custodian mailed a check to our charity on Dec 8, but we haven’t received it yet. While I understand the RMD is suspended for 2020 (and thus no penalty will apply), the donor is concerned that if we do not cash the check until 2021, he will have that amount of income for 2020 because of the 1099 reporting. On the one hand, i think the solution comes in the form of a receipt letter we could issue which contains the date of the check (and postmark of mailing). Any thoughts on that approach?
Otherwise, i would greatly appreciate your comments on why that is not a slam dunk application of Treas Reg 1.170A-1(b), but rather just “in theory” per the below section of the article. Further, why is it only “suggested” that the charity merely receive the check by Dec 31st per constructive receipt. is there anything in the Treas Regs or otherwise to differentiate between a “normal (non-IRA-related) check and an “IRA-related” check?
Some have suggested that the charity merely needs to receive the check by December 31st – such that the charity is in constructive receipt of the distribution – even if the check isn’t cashed until after the end of the year. And Treasury Regulation 1.170A-1(b) stipulates that when a normal (non-IRA-related) check contribution is made to a charity, the date that the check is mailed is sufficient (even if not received by the charity until after the end of the year); in theory, this might be applied for a direct distribution of the charitable distribution from the IRA to the charity (if a Medallion signature is obtained) based on the date that the IRA custodian cuts the check.
Is there any reason a non spousal inherited IRA cannot make a QCD?
Is there any reason why an inherited non-spousal IRA cannot make a QCD? An accountant told a client this is not possible.
My 90 year old Aunt passed away and left me an IRA. When she passed she had not taken her RMD yet. I understand that I need to take her RMD and the rest of the IRA is subject to the SECURE Act 10 year withdrawal provision. Question: As she was 90 (I am UNDER 70.5), can I do a QCD on her last RMD?
If the total aggregating RMD between multiple IRA’s is $150k, is it okay to draw $125k first as income throughout the year then make the final $25k a QCD check written directly to the charity at the end of the year?
I’ve heard conflicting information about the timing and sequence of withdrawals suggesting that we should satisfy the QCD before we’ve exceeded $100k of withdrawals. Let me know what you think about this.
DAF is 100% beneficiary at Death from an IRA. Who takes the RMD, and how. (example RMD amount 100k)
Scenario 2:
DAF is 50% primary beneficiary at Death from an IRA (remaining 50% split between 2 people). Who takes the RMD (Example RMD amount is 100k)
I appreciate the detailed treatment in this post, but it would benefit from being updated to reflect subsequent developments such as the changes in minimum RMD age, inherited IRA RMD rules, and others.