IRA Qualified Charitable Distributions Deliver Tax Benefits
By Mike Rahn, CISP
Updated on January 28, 2021
The list of retirement savings acronyms gives the alphabet a full workout, with examples like “RMD,” “RBD,” and “QLAC,” not to mention “IRA.” One acronym in particular that has special tax implications is “QCD,” which stands for “qualified charitable distribution.” A QCD is an IRA withdrawal that is paid to a qualifying charitable organization, and—if conditions are met—will be tax-free to the giver.
A product of the Pension Protection Act of 2006 (PPA), the QCD provision was intended to encourage charitable giving. It began as an option that expired after two years but was renewed for two-year periods several times before becoming permanent.
Certain conditions must be met for an IRA distribution to be considered a tax-free QCD:
The IRA owner must be age 70½ or older when the distribution is taken. “IRA owner” means both the individual who established the IRA and a beneficiary who has inherited it.
The amount eligible for tax-free treatment is $100,000 per taxpayer, per year. This amount currently is not indexed for inflation.
The distribution must be payable to the charitable organization—not the IRA owner—though the distribution check can be delivered by the donor.
RMD Also Satisfied
In addition to tax-free treatment, QCDs can satisfy a required minimum distribution (RMD) obligation, whether that of the original IRA owner or his beneficiary. It should be noted that, while the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the age when RMDs must begin from 70½ to 72, the QCD rules did not change; QCD eligibility continues to begin at age 70½.
Must Be Eligible IRAs
While every IRA owner age 70½ and older is potentially eligible for the benefits of a QCD, not every IRA is eligible. Assets in IRAs that are part of an ongoing SIMPLE IRA plan or simplified employee pension (SEP) plan are not eligible for QCD treatment. It’s relatively easy to know if a SIMPLE IRA plan is ongoing, given the annual participant notice requirement for the coming plan year, required employer contributions, etc. But SEP plan employer contributions are always discretionary, and there is no clear guidance on what defines “ongoing” in the context of SEP plans.
Must Be Eligible Recipient Organizations
Not all organizations that IRA owners may wish to make donations to qualify for tax-free QCD treatment. The recipient organization must meet the following conditions.
The recipient must be a tax-exempt 501(c)(3) organization to which a taxpayer could make donations and claim a charitable deduction on her U.S. Individual Income Tax Return (IRS Form 1040).
Among private foundations, only those described in Internal Revenue Code Section 170(b)(1)(F) qualify.
The recipient cannot be a donor-advised fund, contributions to which generally permit the donor to retain some control over their use.
An Exclusion; Better Than a Deduction
There’s been some confusion over how a QCD differs from an ordinary charitable contribution that a taxpayer deducts on his Form 1040. There’s a long history of taxpayers making and deducting charitable contributions, but these deductions are limited to a percentage—generally 60 percent or less (increased to 100 percent, with limitations, for 2020 only, by the Coronavirus Aid, Relief, and Economic Security (CARES) Act)—of a filer’s adjusted gross income. A QCD, on the other hand, is a 100 percent write-off of an otherwise-taxable IRA distribution, up to the $100,000-per-year limit.
Report QCDs In Account Owner’s Name
IRA trustees, custodians, and issuers report IRA distributions that are intended to qualify for QCD treatment on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Even though the distributions are paid to a charitable organization rather than to the account owner, they are not reported differently than an amount paid to the account owner. This is because it’s not the financial organization’s responsibility to determine eligibility for the special QCD tax treatment, or to determine the status of the receiving organization.
If the IRA is owned by the person who established the account, normal distribution reporting based on age—or age and potentially qualified status if a Roth IRA—is done. If it is a beneficiary IRA, the distribution is reported as such. It is the IRA owner’s responsibility to claim an exemption from taxation on Form 1040, generally by placing the letters “QCD” on the line that indicates an amount is not subject to tax (Line 4).
If the QCD amount is from a Roth IRA, or from a Traditional IRA and nondeductible Traditional IRA contributions have ever been made, the taxpayer must also file IRS Form 8606, Nondeductible IRAs, with her tax return for the year.
Legislation Could Extend QCDs to Qualified Retirement Plans
One of the oddities of the Internal Revenue Code is that some provisions that apply to IRAs do not apply to qualified (e.g., non-IRA-based) retirement plans, and vice-versa. There is no discernable reason why the QCD option exists for IRAs only, other than perhaps the expectation that by age 70½, most taxpayers will have rolled over qualified plan assets to IRAs.
But with more individuals today working longer, it is not unreasonable to expect that some could benefit from this option being extended to those employer-sponsored plans. In fact, just such a provision is included in the proposed Securing a Strong Retirement Act of 2020, bipartisan retirement legislation that was introduced just days before the general election, and is considered likely to be a blueprint for further retirement plan enhancements this year, or next. This is further evidence that the QCD option has proven its popularity and worth.
