Qualified Charitable Distributions (QCDs) Continue to Be Popular Among IRA Owners

Qualified Charitable Distributions (QCDs) first became available in 2006 to individuals aged 70.5 and older. QCDs were initially available only through the 2007 tax year. But Congress extended the December 31,2007 QCD deadline several times and made QCDs permanent as part of the Consolidated Appropriations Act of 2016. As will be discussed below, SECURE Act 2.0 made two significant changes to the QCD rules.

This column discusses what a QCD is and how it can benefit individuals aged 70.5 and older. As will be explained, QCDs have a timing issue, and if this timing issue is not adhered to by a QCD participant, then the tax benefits associated with a QCD will be lost.

What is a QCD?

A QCD is a tax-free distribution from a traditional IRA made directly to a qualifying charitable organization. The QCD serves a charitable purpose on the part of the traditional IRA owner and can also serve to satisfy the traditional IRA owner’s annual required minimum distribution (RMD). Although not eligible for a charitable contribution tax deduction, a QCD is excluded from the traditional IRA owner’s adjusted gross income (AGI) under IRS rules. A reduction in the IRA owner’s AGI could potentially reduce those taxes that are based on AGI such as Social Security benefits and Medicare Part B monthly premiums.

QCDs are available to IRA owners aged 70.5 and older. During 2025, QCDs of up to $108,000 per IRA owner are allowed to be made.

Importance of Coordinating a Traditional IRA RMD with a QCD to Maximize Tax Benefits

RMDs for traditional IRAs (but not Roth IRAs) start the year as a traditional IRA owner reaches his or her required beginning date, which in recent years has increased from age 70.5 to age 73 (and will eventually rise to age 75 for traditional owners born after December 31,1959). For those traditional IRA owners with charitable intentions, a QCD can reduce and even eliminate the income tax due to RMD income.

However, timing is everything with respect to ensuring a QCD tax benefit. If not coordinated properly with an RMD, a QCD may be treated as ordinary income and therefore fully taxable. This is because the first dollars withdrawn from a traditional IRA in any year in which the traditional IRA owner is subject to RMDs are deemed to satisfy the RMD. This rule is referred to as the “first-dollars out” rule, that in turn creates a timing oddity for QCDs.

Timing Coordination When Executing a QCD

If a traditional IRA owner who is subject to RMD wants to offset the income from an RMD with a QCD, the two transactions must be performed in conjunction with each other. In particular, a traditional IRA owner cannot take their RMD and then retroactively perform a QCD with those same tax dollars. A QCD that is performed after an RMD is taken will result in an additional taxable distribution. If that happens, the RMD will be the first taxable distribution and the QCD will be the second taxable transaction within the same year. It is therefore highly recommended that a QCD should be done early in the year to avoid any conflict with the “first-dollar out” rule.

The following example illustrates how a QCD can become a taxable distribution:

Kathleen, age 76, took her RMD of $12,500 from her traditional IRA in March 2024. In December 2024, Catherine withdrew another $12,500 from her traditional IRA thinking it will qualify as a QCD and offset the $12,500 RMD from her March 2024 traditional IRA distribution.

Kathleen withdrew a total of $25,000 from her traditional IRA during 2024. All $25,000 will be included as taxable income during 2024 because Kathleen took her RMD distribution of $12,500 in March 2024 before she took a QCD of $12,500 in December 2024. To avoid this outcome, Kathleen should have performed her $12,500 QCD early in 2024 before she took her RMD. In so doing, no additional funds would have been needed to be withdrawn from her traditional IRA to satisfy her 2024 traditional IRA RMD. Furthermore, had Kathleen withdrawn at least $12,500 as a QCD early in 2024 and no additional IRA withdrawals during 2024 , then the QCD would have been completely federal and state income tax-free.

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Which Retirement Accounts Permit QCDs?

Individuals aged 70.5 and older can perform QCDs. QCDs during 2025 are permitted from traditional IRAs, including inherited (“death”) IRAs, Roth IRAs and inactive SEP-IRAs and SIMPLE-IRAs. A SEP-IRA or a SIMPLE-IRA is considered “inactive” for  2025 if no employer contribution is made for the plan year ending December 31, 2025.

QCDs are not permitted from employer-sponsored retirement plans. This includes 401(k), 403(b), 457(b) retirement plans and the Thrift Savings Plan.

Some New QCD Rules Resulting from SECURE Act 2.0

SECURE Act 2.0, passed into law in December 2022, resulted in two new rules affecting QCDs:

• Maximum annual QCD amount is indexed to inflation. The maximum annual QCD was $100,000 starting in 2006. Beginning in 2024, the QCD maximum is linked to inflation. The 2025 QCD limit is $108,000 (the QCD limit was $105,000 during 2024).
• One-time opportunity to fund a split-interest entity. Beginning in 2023, traditional IRA owners were offered a once-in-a-lifetime opportunity to use a QCD to fund a charitable remainder unitrust (CRUT), charitable remainder annuity trust (CRAT) or charitable gift annuity (CGA). The maximum (lifetime) distribution was $54,000 in 2025.
  Interested individuals should talk to their financial advisor and/or tax professional whether this transaction can benefit them and the hurdles that must be satisfied in order to reap the tax benefits of this transaction.

Potential Tax Traps Associated with a QCD

There are seven potential QCD tax traps to be aware of. Each potential QCD tax trap is explained below.

• Direct transfer. To receive favorable tax treatment with a QCD, a distribution of traditional IRA must be done as a direct transfer to a qualifying charitable organization. Donor-advisor funds and private foundations do not qualify for QCD favorable tax treatment.
• Tax reporting of a QCD. A QCD is reported on IRS Form 1099-R (Distribution from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, etc.) as a normal IRA distribution and therefore included in taxable income. In other words, the 1099-R will not indicate that the distribution is a QCD and therefore a nontaxable transaction. It is up to the traditional IRA owner or beneficiary to advise their tax preparer to ensure that the favorable QCD tax benefit is received.
• Post-age 70.5 deductible traditional IRA contribution. SECURE Act 1.0 removed the age 70.5 limitation for contributing to a deductible traditional IRA. However, any individual over age 70.5 who makes a deductible traditional IRA contribution and subsequently performs a QCD will have the QCD – up to the amount of the deductible contribution to the traditional IRA – included as taxable income.
• Current year QCD only. A QCD can only be done for the current calendar year. For example, a QCD for 2025 must be completed by December 31, 2025. If the deadline is missed, the traditional IRA owner cannot make a QCD for a prior year.
• No charitable contribution deduction. A tax deduction cannot be taken on one’s federal income tax return as a result of performing a QCD. Also, nothing can be received by the traditional IRA owner from the charity in return for the charitable donation.
• Itemizing is not required to perform a QCD. An individual age 70.5 or older is not required to itemize on his or her federal income tax return (file Schedule A) in order to perform a QCD.
• QCD must consist of before-taxed traditional IRA funds. There are traditional IRA owners over age 70.5 who own traditional IRAs that contain “basis” (after-taxed funds that were contributed to the traditional IRA). The question then comes as to how the traditional IRA then qualifies for QCD treatment. The answer is that QCDs are an exception to the IRS “pro-rata distribution” rule. QCDs are distributed from before-taxed funds first.

RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation, Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Case studies are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any Investment decision, you should consult with your financial advisor about your individual situation.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert

A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.

He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.