Tax Tips - Qualified Charitable Distributions from an IRA

Are you over 70 ½?

Do you have IRA accounts that you must take distributions from?

Do you have a favorite charity?

If you have answered yes to all these questions, you should consider the following tax saving technique, the Qualified Charitable Distribution.

What is a Qualified Charitable Distribution? 

QCDs are TAX-FREE distributions from a Traditional IRA (not a SEP or SIMPLE) that are transferred directly to a qualified charitable entity. Roth IRAs are eligible too, but since most distributions from Roth's aren't taxed, there is normally no real benefit to this. Remember, any distribution from a Traditional IRA is typically taxed as income for the year its taken out, however using this technique, the tax disappears.

Do QCDs count toward my Required Minimum Distribution?

Yes they do! For example, if your RMD is $5,000 and you use $4,000 for a QCD, you will still have to take a $1,000 distribution. If your QCD is beyond your RMD amount, your RMD is considered fully satisfied.

What are the requirements to make the distributions eligible as a QCD? 

  • 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.

  • 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.

  • 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).

What are the limits on QCDs?

  • The maximum dollar amount of a QCD for any individual from his/her IRAs is limited to $100,000 per year. Married couples can do $100,000 from each of their IRAs.

  • QCDs are not tax deductible since they already came from pre-tax money.

For a full explanation of QCDs, including the timing of their completion to make it under the door of a given tax year, please  refer to this article by Michael Kitces.