If you are over the age of 70 ½, the government requires you to take annual distributions (withdrawals) from your retirement account—a provision known as the required minimum distribution (RMD). Up to a certain amount, these distributions may be made tax-free as long as they are directed to a qualified 501(c)(3) organization, an option known as the qualified charitable distribution (QCD). However, current law does not allow donor-advised funds to accept QCDs.
Below is a Q&A with more information. Because each person’s tax situation is unique, we recommend that you consult a tax advisor to discuss your options.
What is a Required Minimum Distribution (RMD)?
Upon turning 70 ½, retirement account holders are obligated to take annual distributions (withdrawals) from their accounts. These mandatory withdrawals are known as the required minimum distribution (RMD). If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the required amount not distributed.
Why do I have to take the RMD?
When you put money into your retirement plan account on a pre-tax basis, you have not yet paid taxes on it. In addition, you also receive a tax deduction if you save in an IRA. When your account grows, it continues to grow tax-deferred. To ensure that taxes are eventually paid on this money, the IRS has determined that distributions must begin (and income taxes be paid) at age 70 ½ in a specific schedule.
What is a Qualified Charitable Distribution (QCD)?
Up to $100,000 of your annual RMD from IRAs may be distributed directly to a 501(c)(3) public charity, enabling you to avoid paying income taxes on that amount. This option is known as a qualified charitable distribution (QCD).
The QCD applies to traditional, rollover and Roth IRAs. SEP and Simple IRAs also qualify (as long as you are no longer actively receiving employer contributions). Employer-sponsored plans do not allow for QCD treatment.
Is Donor-Advised Fund eligible to receive a QCD?
While we would love to offer our donors the ability to distribute their RMD tax-free to a donor-advised fund, federal law does not allow donor-advised funds to accept QCDs. This is because the Pension Protection Act, which established QCDs in 2006, limited them to operating charities. For this reason, donor-advised funds, private non-operating foundations, and supporting organizations are ineligible to accept QCDs.
A direct IRA distribution to a donor-advised fund is therefore treated as a taxable withdrawal from your IRA, which may qualify for an offsetting charitable deduction. While there has been some discussion in Congress about allowing donor-advised funds to receive QCDs, no changes have been made to date.
What are some charitable giving options for RMDs?
- You can still donate your RMD to a donor-advised fund. You will have to pay income taxes on the distribution, but the subsequent charitable contribution tax deduction may help offset these costs.
- You can donate your RMD directly to a qualified 501(c)(3) public charity. As long as the charity qualifies, this distribution can be made tax-free.
Do I qualify for a QCD if I give Roth IRA distributions to a donor-advised fund since I’ve already paid taxes on that money?
Technically yes, but you also likely may not want to. Because the Roth IRA contributions have already been taxed, qualified earnings are tax-free, and RMDs do not apply to these accounts (original account holders aren’t required to take an RMD but their non-spouse beneficiaries are when they inherit the account).
You may instead want to consider donating appreciated securities rather than donating from your Roth IRAs due to the double tax benefit of avoiding the tax on the capital gains and appreciation, in addition to receiving the charitable tax deduction.
How do I report a qualified charitable distribution on my income tax return?
To report a qualified charitable distribution on your Form 1040 tax return, you generally report the full amount of the charitable distribution on the line for IRA distributions. On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution. Enter “QCD” next to this line. See the Form 1040 instructions for additional information.
You must also file Form 8606, Nondeductible IRAs, if:
- you made the qualified charitable distribution from a traditional IRA in which you had basis and received a distribution from the IRA during the same year, other than the qualified charitable distribution; or
- the qualified charitable distribution was made from a Roth IRA.
Resources for more information on RMDs and QCDs: