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George F. Bearup, J.D. Senior Legal Trust Advisor

18-Jul-22

Qualified Charitable Distributions- A Few ‘Forgotten’ Limitations

Take-Away: Qualified Charitable Distributions from a traditional IRA is a great way to carry out charitable giving and also potentially avoid higher marginal federal income tax brackets. That said, there are some technical rules that must be complied with in order to exploit this opportunity.

Background: A qualified charitable distribution (QCD) is the direct payment of assets to a charity using a traditional IRA as the source of the gift. The distribution from the traditional IRA to the charity is not included in the IRA owner’s taxable income for the year, however, the distribution will satisfy the donor’s required minimum distribution (RMD) obligation for the calendar year, up to $100,000 per year. While QCD’s continue to gain popularity, there are some technical rules that donors tend to overlook, or at times stumble over. What follows is a short summary of some of the technical rules, aka traps, that a donor needs to keep in mind when making a QCD.

  1. No Carryover of an Excess QCD: The amount that can be contributed as a QCD is not limited to $100,000, but only up to that ceiling amount will be excluded from the donor’s taxable income for the year of the QCD. Consequently, the excess amount above the $100,000 annual limit cannot be carried over and used in a subsequent year. The excess QCD amount is, therefore, taxable income to the donor in the calendar year in which the QCD is made. [Note: Part of the proposed SECURE 2.0 Act passed by the House in March (and somewhere, languishing before a couple of Senate Committees) would provide that this $100,000 annual limitation would be subject to cost-of-living adjustments for future years.]
  2. Only IRAs: A QCD can only be made from IRAs. That means that a QCD cannot be made from a 401(k) account. However, retirement funds can be rolled out from a 401(k) account into a traditional IRA established by the donor, and then the QCD can be made from the traditional IRA. With those steps, the distribution from the traditional IRA will qualify as a QCD.
  3. Inactive SEP/SIMPLE IRAs: A QCD can be made from SIMPLE IRAs and SEP IRAs, but only if the SIMPLE IRA or SEP IRA is An inactive IRA is one where there was no contribution made to the SIMIPLE or SEP  IRA in the year in which the QCD is made.
  4. Roth IRAs: A QCD can only be made using taxable This is a statutory exception to the pro-rata rule, a/k/a the “cream-in-the-coffee” rule. Thus, if the source of the QCD is a Roth IRA, only taxable amounts held in the Roth IRA (if any) can be used for the QCD. The upshot of this rule is that a Roth IRA is not a good candidate from which to fulfill philanthropy using the QCD strategy.
  5. Disqualified Charities: A QCD must be made to a qualified public charity, i.e. an IRC 501(c)(3) organization. However, not all publicly supported charities qualify as a QCD recipient: donor advised funds (DAF),’ supporting’ charitable organizations, and private grant-making foundations are not eligible recipients of a QCD. [Note: There are a couple of bills in Congress that would authorize a QCD to be made to a donor advised fund, subject to the limitation that the contributed funds would then have to be distributed from the DAF to public charities within a specified period after the QCD.]
  6. No Split-Interest Gifts: A QCD cannot be used as a split-interest gift to a qualified charity, such as a charitable remainder unitrust (CRT) or a charitable gift annuity (CGA.) A direct gift from the IRA to the charity will qualify as a QCD. .[Note: The QCD rules do permit the IRA custodian to write a check from the traditional IRA to the charity, and then deliver the check to the donor, who in turn hands the check over to the charitable recipient.]
  7. Charitable Pledges: A QCD can be used to satisfy a donor’s outstanding pledge to a qualified charity, up to the $100,000 a year annual limitation.
  8. Actually Age 70 ½: A QCD can be made only when the donor is actually age 70 ½, not just the year in which the donor turns age 70 ½. In short, timing is everything when it comes to QCDs made from the donor’s traditional IRA.

Conclusion: Finally, there is another aspect of confusion when making a QCD from a traditional IRA. The distribution from the IRA will always precipitate the issuance of a Form 1099-R from the IRA custodian. However, no where on the face of Form 1099-R is there a code that indicates that the distribution from the IRA (otherwise taxable) is a QCD. That additional information must be included on the donor’s Form 1040 filed with for the year in which the QCD is made. Hopefully Form 100-R will be updated to include a code for QCDs in the near future.