Can You Process A Qualified Charitable Distribution (QCD) From an Inherited IRA?

Qualified Charitable Distributions are an advanced tax strategy used by individuals who are age 70½ or older who typically make annual contributions to their church, charity, or other not-for-profit organizations.  QCDs allow individuals who have pre-tax IRAs to send money directly from their IRA to their charity of choice, and they avoid having to pay tax on those distributions.   However, a client recently asked an excellent question:

“Can you process a qualified charitable distribution from an Inherited IRA?  If yes, does that QCD also count toward the annual RMD requirement?”

QCD from an Inherited IRA

The short answer to both of those questions is “Yes”.   As long as the owner of the Inherited IRA account is age 70½ or older, they would have the option to process a QCD from their inherited IRA, and that QCD amount would count towards the annual required minimum distribution (RMD) if one is required.

What is a QCD?

When you process distributions from a Traditional IRA account, in most cases, those distributions are taxed to the account owner as ordinary income. However, once an individual reaches the age of 70½, a new distribution option becomes available called a “QCD” or a qualified charitable distribution.    This allows the owner of the IRA to issue a distribution directly to their church or charity of choice, and they do not have to pay tax on the distribution.

Backdoor Way To Recapture Tax Deduction for Charitable Contribution

Due to the changes in the tax laws, about 90% of the taxpayers in the U.S. elect to take the standard deduction when they file their taxes, as opposed to itemizing.  Since charitable contributions are an itemized deduction, that means that 90% of taxpayers no longer receive a tax benefit for their charitable contributions throughout the year. 

A backdoor way to recapture that tax benefit is by making a QCD from a Traditional IRA or Inherited Traditional IRA, because the taxpayer can now avoid paying income tax on a pre-tax retirement account by directing those distributions to a church or charity.  So, in a way, they are recapturing the tax benefits associated with making a charitable contribution, and they do not have to itemize on their tax return to do it.

QCD Limitations

There are three main limitations associated with processing qualified charitable distributions:

The first rule that was already mentioned multiple times is that the individual processing the QCD must be 70½ or older. For individuals turning 70½ this year, a very important note, you cannot process the QCD until you have actually turned 70½ to the DAY.  I have seen individuals make the mistake of processing a QCD in the year that they turn 70½ but before the exact day that they reached age 70½. In those cases, the distribution no longer qualifies as a QCD. 

Example: Jen turned 70 in February 2024, and she wants to make a QCD from her Inherited IRA. Jen would have to wait until August 2024, when she officially reaches age 70½, to process the QCD.  If she attempts to process the QCD before she turns 70½, the full amount of the IRA distribution will be taxable to Jen.

QCD $100,000 Annual Limit

Each taxpayer is limited to a total of $100,000 in QCDs in any given tax year, so the dollar limit each year is relatively high.  That full $100,000 could be remitted to a single charity or it could be split up among any number of charities. 

QCD’s Can Only Be Processed From IRAs

If you inherit a pre-tax 401(k) account, you would not be able to process a QCD directly from the 401(K) plan.  401(k) accounts are not eligible for QCDs.  You would first have to rollover the balance in the 401(K) to an Inherited IRA, and then process the QCD from there.

QCDs Count Toward the RMD Requirement

If you have inherited a retirement account, you may or may not be subject to the new 10-year rule and/or required to take annual RMDs (required minimum distributions) for your inherited IRA each year.  For purposes of this article, if you subject to the annual RMD requirement, these QCD count toward the annual RMD amount.

Example: Tom has an inherited IRA and he is subject to the new 10-year rule and is also required to distribute annual RMD’s from the IRA during the 10 year period. If the RMD amount of 2025 is $5,000, assuming that Tom has reached age 70½, he would be eligible to process an QCD for the full amount of the RMD, he will be deemed as satisfying the annual RMD requirement, and does not have to pay tax on the $5,000 distribution that was directed to charity.

This is also true for 10-year rule distributions. If someone gets to the end of the 10-year period, there is $60,000 remaining in the inherited IRA, and the account owner is age 70½ or older, they could process a QCD for all or a portion of that remaining balance and avoid having to pay tax on any amount that was directed to a charity or not-for-profit.

QCD Distributions Must Be Sent Directly To Church or Charity

One of the important rules with processing these QCDs is the owner of the Inherited IRA can never come into contact with the money.  The distribution has to be sent directly from the IRA custodian to the church or charity.

For our clients, a common situation is sending money directly to their church as opposed to putting money in the offering plate each Sunday.  If they estimate that they donate about $4,000 to their church throughout the year, in January, they request that we process a QCD from their inherited IRA to their church in the amount of $4,000 and that amount is a non-taxable distribution from their IRA. 

When the distribution is requested, we have to ask the client how to make the check payable and the mailing address of the church, and then our custodian (Fidelity) processes the check directly from their IRA to the church.

No Special Tax Code on 1099-R for QCDs

Anytime you process a distribution from an inherited IRA, the custodian of the IRA will issue you a 1099-R tax form at the end of the year so you can report the distribution amount on your tax return. With QCD, there is not a special tax code indicating that it was a QCD. If you use an accountant to prepare your taxes, you must let them know about the QCD, so they do not report the distribution as taxable income to you.

Summary

For individuals who inherit Traditional IRAs and have charitable intent, processing Qualified Charitable Distributions each year can be an excellent way to recapture the tax deduction that is being lost for their charitable contributions while at the same time counting toward the annual RMD requirement for that tax year.  

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.