Learn About Qualified Charitable Distributions

A Tax-Effective Way to Donate Money to Charity

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A qualified charitable distribution (QCD) is a withdrawal from an individual retirement arrangement (IRA) that's made directly to an eligible charity. It effectively bypasses the owner of the account. IRA account holders who are at least age 70½ as of Dec. 31, 2019, or who reach age 72 after this date, can contribute some or all of their IRAs to charity.

The SECURE Act of 2019 increases the age threshold to 72 for those who have not reached age 70½ by Dec. 31, 2019.

It might seem counterintuitive that anyone would want to do give their savings away after making contributions for years in anticipation of the day when they would retire, but it can be advantageous from a tax perspective in a few ways.

Required Minimum Distributions 

You must begin taking required minimum distributions (RMDs) when you reach age 70 1/2 if you have a traditional IRA and if you reached this age before Dec. 31, 2019—even if you don't want or need the money at that point in time. These distributions are taxable at ordinary income rates—whatever tax bracket you're in that particular year.

Otherwise, you have until you reach age 72 to begin taking RMDs.

In most cases, you'll have to pay a 50% excise tax on the amount you were supposed to take but didn't if you don't take RMDs, even though you never enjoyed the use of that money. 

How a Qualified Charitable Distribution Can Help

QCDs count toward your required minimum distribution for the year. If you have to take RMDs but you don't really want or need the money, QCDs can be a good way to distribute the minimum required amount out of the IRA and avoid that 50% excise tax penalty. As an added benefit, you'll avoid paying income tax on the distributions, as is required if you take the funds for your personal use. 

Any QCDs you make are considered to come out of taxable IRA funds first if you have basis in a nondeductible traditional IRA. Normally, distributions are split proportionately between taxable funds and nontaxable basis.

Qualifying Rules for QCDs

You must be at least 70½ or 72 years old at the time you make a qualified charitable distribution, depending on when you reached age 70½. The funds must be transferred directly from the IRA custodian to the eligible charity—and "eligible" is an important word here.

The IRS indicates that it's acceptable procedure for the IRA custodian to make a check payable to the charitable organization and let the IRA owner deliver the check to the charity. 

The charity must be one that is approved by the IRS. You can't simply turn the money over to your neighbor. Eligible charities include 501(c)(3) organizations and houses of worship. Donor advised funds and so-called supporting organizations are not permitted to receive QCDs on a tax-advantaged basis.

The IRS offers a searchable database of approved charities on its website.

The maximum amount that can be donated through a qualified charitable distribution is $100,000 per IRA owner as of 2020. This means that each spouse can donate $100,000 if you're married, but you can't "share" the limit. In other words, one spouse can't give $125,000 and the other $75,000. You're each separately subject to the $100,000 limit.

Effect on Your Adjusted Gross Income 

QCDs can be used to help keep your adjusted gross income (AGI) and taxable income within a desired range, because income from a charitable distribution "bypasses" your Form 1040. This can help prevent your income from reaching the thresholds for the net investment income tax and from disqualifying you from claiming other tax breaks.

These thresholds depend on your filing status, which is determined by factors such as whether you're married, widowed, or support one or more child dependents. As of the 2019 tax year, they are:

  • Married filing jointly: $250,000
  • Married filing separately: $125,000
  • Qualifying widow(er): $250,000
  • Head of household: $200,000
  • Single: $200,000

The Rules Are Different for Roth IRAs

This rule applies only to traditional IRAs, not to Roth IRAs. It's possible to take a QCD out of a Roth IRA, but there's generally no advantage in doing so because Roth IRA distributions are already tax-free. You can't deduct contributions made to Roth accounts, so you've already paid taxes on those dollars you contributed.

Roth IRAs aren't subject to RMDs, either, so the more tax-efficient move might be to use a traditional IRA to fund the QCD if you have one.

QCDs can't come out of SEP IRA or SIMPLE IRA plans, either.

You Can't Claim a Deduction, Too 

The key benefit of a QCD is that the distribution amount is not included on your Form 1040 as income, but there's a bit of a downside here, too.

The QCD cannot also be used as a deductible charitable contribution if you itemize your deductions. That would be something of a double tax break for the same transaction. 

A QCD has no effect on your ability to claim the standard deduction, however, and the Tax Cuts and Jobs Act effectively doubled standard deductions for all filing statuses beginning in 2018. Itemizing might be less advantageous for many taxpayers than it was in previous years anyway.

You would need more in overall itemized deductions than the standard deduction for your filing status to make itemizing worthwhile.

QCDs can benefit seniors who take the standard deduction rather than itemize because there's no tax benefit in making a donation to charity when you claim the standard deduction. You're not losing anything by making the QCD.

For non-itemizers, donating to charity via a direct transfer out of an IRA is the only way to get a tangible tax benefit from that donation.

NOTE: Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.

Article Sources

  1. IRS. "IRA FAQs - Distributions (Withdrawals)." Accessed March 15, 2020.

  2. IRS. "IRA Required Minimum Distributions." Page 1. Accessed March 15, 2020.

  3. IRS. "IRA FAQs - Distributions (Withdrawals)." Accessed March 16, 2020.

  4. IRS. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)." Accessed March 15, 2020.

  5. IRS. "Questions and Answers on the Net Investment Income Tax." Accessed March 15, 2020.

  6. IRS. "Roth IRAs." Accessed March 15, 2020.

  7. IRS. "Retirement Topics — Required Minimum Distributions (RMDs)." Accessed March 15, 2020.

  8. Fidelity Investments. "Donating to a Charity Using a Qualified Charitable Distribution (QCD)." Accessed March 15, 2020.