Are QCDs Really Allowed from a 401(k)? – Avoid This Mistake + FAQs

What You’ll Learn in This Article:

• If and how you can make tax-free charitable donations from a 401(k) 🔍
• The federal IRS rules that limit QCDs to IRAs, and why 401(k)s are excluded ⚖️
• Smart strategies to give from your 401(k) (via IRA rollovers) without paying extra taxes 💡
• How state tax laws handle QCDs differently, with examples like New Jersey and North Carolina 🌎
• Common mistakes to avoid when planning charitable gifts from retirement accounts 🚫

Qualified Charitable Distributions have become a popular tax-saving strategy for generous retirees. By donating IRA withdrawals directly to charity, older adults can satisfy required distributions without increasing their taxable income.

What Exactly Is a Qualified Charitable Distribution (QCD)? 🔍

A Qualified Charitable Distribution (QCD) is a direct transfer of funds from your IRA to a qualified charity, executed in a way that the money never passes through your hands. Essentially, your IRA custodian sends the money straight to the charity of your choice.

If done correctly, that distribution is excluded from your taxable income. This is a big deal because normally any withdrawal from a traditional IRA is taxed as income. With a QCD, you get to donate to a cause you care about and avoid paying income tax on that amount.

QCDs are especially attractive to people who are subject to Required Minimum Distributions (RMDs). Once you reach a certain age (currently 73 for most retirees, due to recent changes in law), the IRS forces you to take minimum withdrawals from your tax-deferred retirement accounts each year. These RMDs can bump up your income and your tax bill.

However, if you direct your RMD (or part of it) to a charity via a QCD, it counts toward your RMD but isn’t taxed. In other words, the donated portion of your RMD becomes tax-free.

There are a few important conditions to qualify as a QCD:

• Age Requirement: You must be at least 70½ years old to use a QCD. (Yes, the rule still says 70½ – that half-year matters! You become eligible on the date exactly six months after your 70th birthday.)

• Annual Limit: Historically, you could donate up to $100,000 per year as QCDs. As of recent legislation, this limit is now indexed for inflation, so it’s gradually increasing (for example, around $105,000 for the year 2024). If you’re married, you and your spouse can each donate up to the limit from your own IRAs, effectively doubling the impact.

• Eligible Accounts: QCDs can only be made from eligible IRAs – which include traditional IRAs (and in some cases inactive SEP or SIMPLE IRAs). Employer-sponsored plans like 401(k)s and 403(b)s are not eligible for QCDs. (We’ll explain why shortly.) If you happen to have an “ongoing” SEP or SIMPLE IRA (meaning your employer is still contributing to it this year), you’d need to roll those funds into a traditional IRA first, because the IRS doesn’t allow QCDs directly from a plan that’s still receiving contributions.

• Qualified Charities: The funds must go to a qualified 501(c)(3) charitable organization. Most public charities, religious institutions, and nonprofit organizations qualify. However, you cannot do a QCD to a private foundation or a donor-advised fund. The law explicitly excludes those. Also, the donation must be one that would qualify for a full charitable deduction otherwise – for instance, you can’t receive any goods or services in return (no tickets, dinners, or special perks; it has to be a pure donation).

• Direct Transfer: The distribution must be made payable directly to the charity. If the check is made out to you and then you later give it to charity, it doesn’t count as a QCD. Many IRA custodians will even mail the check to you (for forwarding to the charity) but make it payable to the charity – that’s fine. The key is that the money never becomes your possession.

• Tax Reporting: You won’t get a special IRS form that screams “QCD” on it. Your IRA withdrawal will show up on a 1099-R form as a normal distribution. It’s up to you or your tax preparer to report it as a non-taxable QCD on your tax return. Typically, you’d subtract the QCD amount from the total IRA distributions on the tax form and write “QCD” in the margin or a designated line. It’s also wise to obtain an acknowledgment receipt from the charity (just like any charitable donation) in case of an audit.

Federal Law: Why the IRS Says “No” to 401(k) QCDs 🚫

Federal tax law is very clear on this point: Qualified Charitable Distributions are only permitted from IRAs, not from 401(k)s or other employer-sponsored plans.

The IRS’s own rules (outlined in the Internal Revenue Code, Section 408(d)(8)) define a QCD as a distribution from an IRA that is made directly to a charity.

Notice the specific wording – it doesn’t mention 401(k), 403(b), 457(b), or any other type of plan. In practical terms, this means you cannot directly do a QCD from a 401(k) account under current federal law.

This might surprise people who have significant assets in a 401(k) or similar plan from their years of work. After all, a 401(k) is also a retirement account with tax-deferred savings, and it too can have required minimum distributions.

Why would Congress limit the QCD tax break to IRAs only? To understand, let’s consider how the rules work:

• Legislative History: QCDs were introduced as part of the Pension Protection Act of 2006 as a way to encourage charitable giving from IRAs. Initially, it was a temporary provision, but it became so popular that Congress extended it several times and eventually made it permanent in 2015.

• Throughout these legislative actions, the language consistently applied to IRAs and not to employer plans. Lawmakers likely focused on IRAs because they are individually owned and widely used by retirees taking RMDs.

• Plan Differences: IRAs and 401(k)s have different distribution rules. Notably, if you’re still working at age 73 or beyond and have a 401(k) with your employer, you might not be subject to RMDs from that 401(k) yet (thanks to the “still-working exception” in tax law for many employer plans).

• With IRAs, there’s no such exception – once you hit RMD age, you must take distributions regardless of your employment status. By limiting QCDs to IRAs, the provision targeted the accounts where RMDs definitely apply for older individuals. In a sense, Congress gave a break to those who must take money out of their IRAs anyway.

• Administrative Practicality: Another reason may be simplicity. Allowing QCDs from every type of plan could complicate administration and reporting. IRA custodians already have a process to send distributions directly to charities on behalf of the account owner.

• Employer plans, however, might not have uniform procedures for charitable transfers. By confining QCDs to IRAs, it’s easier for the IRS and financial institutions to ensure the rules are followed properly.

• No Loopholes for Early Access: The IRS and Congress likely wanted to prevent people from using QCDs as a sneaky way to withdraw from a 401(k) tax-free while still working. If QCDs were allowed from 401(k)s, a 68-year-old still employed could potentially funnel money out of their 401(k) to charity just to avoid taxes (even though they aren’t required to take distributions yet).

• Keeping the QCD to IRAs, which most people fund when they retire or roll over funds, avoids this scenario. Essentially, no one gets to tap their active employer plan tax-free under the guise of charity unless they truly separate those funds into an IRA.

The bottom line is that under federal law, your 401(k) cannot directly send a QCD to a charity.

If you instruct your 401(k) plan administrator to send money to a charity, that distribution will still be treated as taxable income to you (and then you’d potentially get a normal charitable deduction if you itemize). It won’t get the special tax-free treatment of a QCD.

To put it plainly, QCDs are an “IRA-only” perk. It doesn’t matter if your 401(k) balance is $50,000 or $5,000,000 – you can’t directly transfer those dollars to charity tax-free the way you can with an IRA.

Let’s illustrate this with a quick comparison example:

• Example – 401(k) vs. IRA Donation: Imagine Jane is 75 and has a large 401(k) from her career, and also a traditional IRA she established after retiring. She wants to donate $10,000 to her favorite charity this year.

• If Jane tries to send $10,000 directly from her 401(k) to the charity, the 401(k) plan will treat it as a normal withdrawal. Jane will receive a 1099-R showing $10,000 of taxable income, because 401(k) distributions are taxable. She can then donate the $10,000 to the charity and, if she itemizes deductions, claim a $10,000 charitable deduction.

• Net effect: Jane’s taxable income might net out if she deducts the donation, but her AGI was higher in the process, and if she doesn’t itemize (many seniors don’t, due to a high standard deduction), she gets no tax benefit at all from the donation.

  On the other hand, if Jane instead takes $10,000 from her IRA as a QCD directly to the charity, the $10,000 does not show up as taxable income at all. It fulfills part of her IRA’s RMD and she doesn’t need to itemize to get the benefit.

• Net effect: Jane’s AGI and taxable income stay $10,000 lower than they would have been, potentially keeping her in a lower tax bracket and reducing things like Medicare premium surcharges. The charity still gets the full $10,000. Clearly, the IRA route was much more tax-efficient for her donation.

Clearly, the IRA route has a big advantage. We now see why people care about doing QCDs—it’s about being charitable in the most tax-efficient way.

So if you have a lot of money in a 401(k), what can you do to use QCDs? The answer is: you might consider moving some money from your 401(k) to an IRA.

Smart Strategy: Using an IRA Rollover to Achieve QCDs from a 401(k) 💡

Just because you can’t directly send a QCD from a 401(k) doesn’t mean you’re out of luck. Many savvy retirees use a workaround strategy: move funds from the 401(k) into an IRA, and then do the QCD from the IRA.

This lets you take advantage of the QCD benefit even if your retirement savings are currently in a 401(k) plan.

Here’s how this strategy works step-by-step:

1. Rollover the 401(k) to an IRA: Initiate a direct rollover (a trustee-to-trustee transfer) of some or all of your 401(k) balance into a traditional IRA. If you’re retired and no longer with the employer, you generally have the right to roll your 401(k) into an IRA anytime. If you’re still working at that company, check if your plan allows in-service withdrawals or partial rollovers after a certain age (often 59½). Many plans do allow this for older employees. The key is to do the rollover directly from the plan to the IRA so it’s not a taxable event – the money goes from one custodian to another, with no taxes withheld. This preserves the tax-deferred status of your savings.

2. Mind Your RMD Timing: If you are already in a year where you must take an RMD from the 401(k), be careful. By law, you cannot roll over an RMD after it’s due – the first dollars out of a 401(k) in an RMD year are deemed to be that RMD. For example, if you turned 73 this year and have a 401(k) RMD of $20,000 due, you can’t avoid that by rolling the account to an IRA mid-year. The IRS will insist that you take the $20,000 RMD first (and pay tax on it, or donate it via the normal method), before rolling over any additional funds. So, the smart move is to roll over to an IRA before the year you hit 73 (or whatever your RMD age is) or at least before taking any distribution in the year you have an RMD due. Once the funds are in the IRA, next year’s RMD can be satisfied via QCD from the IRA. In short, plan ahead: complete your rollover prior to the year you’d be required to take a 401(k) RMD, if possible.

3. Do QCDs from the IRA: Once the funds land in the IRA, you can instruct the IRA custodian to send payments to your chosen charities as QCDs. From this point, it works just like a normal QCD scenario. You’ll ensure you meet the QCD requirements (age 70½, etc.) and then have the IRA send the money out directly to the charities. You can choose multiple charities if you want – for example, $5,000 to your church, $5,000 to a food bank – as long as the total QCD amount stays within your annual limit. Remember, each dollar you send via QCD is a dollar less of taxable distribution on your return, and it counts toward your IRA’s RMD for the year.

4. Enjoy the Tax Benefits: The end result is that you’ve transformed what would have been a taxable 401(k) distribution into a tax-free charitable gift via the IRA. The charity gets the same amount of money, but your IRS Form 1040 looks a lot better (lower income). You’ve effectively unlocked the QCD ability by moving money into an IRA.

It’s worth noting that rolling over a 401(k) to an IRA has other implications beyond QCDs. Most of the time it’s straightforward and beneficial, but here are a few considerations:

• Tax Neutrality: A direct rollover is not taxable and not a reportable income event (you’ll get a 1099-R, but it shows a rollover code). So moving your money doesn’t trigger tax, as long as you do it directly.

• Investment Choices and Fees: IRAs often have more investment options and sometimes lower fees than employer plans. By rolling over, you might get access to a broader range of funds or brokerage options. This isn’t directly related to QCDs, but it’s a side benefit many retirees enjoy when consolidating accounts.

• Creditor Protection: 401(k) plans have strong federal creditor protection. Traditional IRAs also have protection (for bankruptcy up to around $1.5 million, and varying protection from lawsuits depending on state law). Before rolling over, consider how your state treats IRA asset protection versus the ERISA protection of a 401(k). In many cases, this isn’t a deal-breaker, but it’s a point to be aware of if asset protection is a concern.

• Company Stock (NUA): If your 401(k) holds highly appreciated company stock, you might be eligible for a special tax break called Net Unrealized Appreciation (NUA) by distributing the stock to a taxable account instead of an IRA. Rolling that stock into an IRA would forfeit the NUA break. Charitable planning could intersect here: for example, rather than a QCD (which isn’t allowed from a 401(k) anyway), one might donate appreciated stock to charity or use the NUA stock in charitable strategies. If NUA is relevant to you, talk to a financial advisor before rolling everything to an IRA.

For most people, the rollover-to-IRA strategy is the straightforward path to make QCDs possible. Many financial advisors and CPAs (such as IRA expert Ed Slott) recommend that generous retirees consolidate old 401(k) accounts into IRAs once they’re not working, precisely to give more flexibility for things like QCDs.

National nonprofit organizations like AARP and major financial firms regularly publish guides on using this “IRA charitable rollover” strategy, because it helps retirees give more to charity while paying less in taxes.

Example – Rollover Strategy in Action:
Let’s revisit John from our earlier example. Suppose John has $500,000 in his 401(k) and no IRA set up yet. He’s 75 and charitably inclined.

Rather than struggle with taxable 401(k) withdrawals, John decides to roll over $400,000 of his 401(k) into a new IRA this year. (He leaves $100,000 temporarily, perhaps to keep his 401(k)’s low-cost institutional funds for a bit longer – or he could roll it all, either way.) The direct rollover moves the money without any tax.

Now John has an IRA with $400,000. He instructs his IRA custodian to send $10,000 to his favorite charity as a QCD this year, satisfying that portion of his RMD.

Since John had to take a separate RMD from the remaining 401(k) portion (as required by law for the amount left in the 401(k)), he went ahead and did that for $4,000 and unfortunately paid taxes on that small piece. But going forward, John plans to roll that last chunk into the IRA as well.

Next year, all his RMDs will come from the IRA, and he can use QCDs for the full amount he wants to donate.

In the end, John successfully navigated the rules: he brought his money under the “IRA umbrella” to unlock the QCD ability, and now he can reduce his taxable income each year by giving to charity directly from the IRA.

This strategy showcases how someone with a 401(k) can still take advantage of QCDs – it just requires an extra step. The good news is that IRA rollovers are commonplace and easy to initiate. Just be sure to coordinate the timing with any RMD requirements as discussed, and always do direct rollovers (never have the 401(k) cut a check to you, or you’ll have withholding and potential tax complications).

QCD vs. Traditional Charitable Deduction: Which Saves You More? 🤔

You might wonder, if a direct QCD from a 401(k) isn’t allowed, can’t I just take a distribution from the 401(k), give it to charity, and claim a deduction? How different is that from a QCD, really?

Let’s compare the Qualified Charitable Distribution method with the traditional withdraw-and-donate method to see the differences:

1. Effect on Taxable Income and Adjusted Gross Income (AGI):

• QCD: The distribution does not count as income on your tax return. It’s completely excluded from your AGI. This is powerful because a lower AGI can help you avoid higher tax brackets and also reduce taxes on Social Security benefits or Medicare premium surcharges.
• 401(k) Withdrawal + Donation: The distribution from the 401(k) is included in your taxable income (raising your AGI), and then you may get a deduction if you itemize. Even if the deduction offsets the taxable income on paper, your AGI was higher in the process, which can have ripple effects on other tax calculations. If you take the standard deduction (not itemizing), then the charitable gift doesn’t specifically reduce your taxes at all in this scenario – you’d be paying tax on the full distribution.

2. Need to Itemize Deductions:

• QCD: No need to itemize. You can take the standard deduction and still benefit, because the charitable amount is excluded from income up front. This is ideal for many retirees who no longer itemize due to the large standard deduction.
• 401(k) Withdrawal + Donation: To get any tax benefit from the donation, you must itemize your deductions. If you don’t itemize, giving to charity after taking a distribution won’t affect your tax bill (beyond the joy of giving).
• Even if you do itemize, you’re effectively using one hand to give and the other hand to take away on the tax form (income up, deduction down). There’s also the risk that part of your donation isn’t deductible due to AGI limits (see next point).

3. Tax Deduction Limits:

• QCD: Not subject to the percentage-of-income limits that normal charitable deductions face. You can QCD up to the legal limit (e.g. $100k per year, indexed) regardless of your income level.
• So a retiree with a $100,000 IRA balance could conceivably donate the whole thing in one year via QCD without worrying about deduction caps (aside from the $100k ceiling).
• 401(k) Withdrawal + Donation: Subject to charitable deduction limits (typically 60% of AGI for cash gifts in a year). If you took a very large distribution and gave it all to charity, you might not be able to deduct it all in one year, resulting in carryover deductions for future years.
• Meanwhile, you paid tax on the full distribution in the current year. For most people, this isn’t an issue with moderate donations, but it’s something to keep in mind for large gifts.

4. Simplicity and Record-Keeping:

• QCD: Fairly simple. You just need to keep the charity’s acknowledgment letter and ensure the 1099-R is reported correctly as a non-taxable distribution. There’s no separate deduction form needed since you aren’t itemizing it. One thing to remember: you cannot double-dip by also deducting a QCD – but since it’s excluded from income, you wouldn’t have any reason (or ability) to deduct it.
• 401(k) Withdrawal + Donation: Requires more steps on the tax return. You include the distribution in income, then list the donation on Schedule A if itemizing. You must also keep all documentation for the charitable donation (receipts, acknowledgment letters).
• Mistakes can happen – e.g., not itemizing when you should, or misreporting the distribution – which could cause you to pay more tax than necessary or invite IRS scrutiny. In short, there’s more room for human error.

Below is a quick comparison table highlighting these differences:

As you can see, the QCD route tends to be more advantageous for those who qualify. The traditional withdrawal-and-donation method can still yield a tax benefit if you itemize, but it doesn’t help with AGI and is generally less efficient.

Pros and Cons of QCDs

Now that we’ve compared methods, let’s summarize the pros and cons of using Qualified Charitable Distributions in your tax planning:

For anyone who is eligible (age 70½+) and has significant assets in IRAs, the pros of QCDs usually far outweigh the cons. The main “con” that relates to our topic is the IRA-only rule – but as we’ve discussed, you can often work around that by rolling funds into an IRA.

State-Level Nuances: How QCDs Affect Your State Taxes 🌎

So far, we’ve focused on federal law, which is what defines QCDs. But what about state income taxes? If you do a QCD and avoid federal tax, will your state also give you a free pass on that distribution?

The answer varies by state, but in many cases, states do follow the federal treatment – however, there are some quirks:

• States with No Income Tax: If you live in a state like Florida, Texas, Nevada, or any of the handful of states with no state income tax, you won’t pay state tax on retirement distributions regardless. In those states, a QCD’s state tax impact is moot (there’s no state tax either way). 😎

• States that Conform to Federal AGI: Many states calculate their income tax starting with your federal Adjusted Gross Income. If a QCD is excluded from your federal AGI, it is automatically excluded from your state income as well, because it never enters the calculation.

• For example, California and New York begin with federal AGI, so a QCD that lowers your AGI federally will also lower your taxable income in those states. You don’t have to do anything extra.

• States with Add-Back Requirements (Non-Conformity): A few states don’t automatically follow the federal rules on QCDs.

• For instance, New Jersey uses its own gross income tax system and historically did not recognize the QCD exclusion. In other words, a distribution from an IRA to a charity still counted as income for NJ tax purposes (since NJ had no provision to exclude it), even though it was tax-free federally. This meant a New Jersey resident would still owe NJ state tax on a QCD amount.

• Similarly, Massachusetts and some other states don’t allow a deduction for retirement contributions and might not fully exclude certain retirement distributions. Always check your state’s specific rules.

• Case Study – North Carolina: North Carolina provided an interesting example a few years ago. Initially, NC did not conform to the federal QCD rules, and taxpayers had to add back QCDs to state income.

• This was unpopular, and in 2019, North Carolina passed a law to conform to the federal treatment. Now NC taxpayers 70½ and older can exclude QCDs from state taxable income, just as they do federally. This shows that state laws can change – it’s worth staying updated on your state’s stance.

• States with Retirement Income Exemptions: Some states partially or fully exempt retirement income for seniors. Pennsylvania, for example, does not tax retirement distributions (like IRA or 401k withdrawals) for individuals above age 59½.

• If you live in PA, any IRA withdrawal is tax-free at the state level already, so a QCD doesn’t provide additional state tax savings (because there were no state taxes on that money to begin with). Similarly, other states might exempt a certain amount of pension or IRA income each year. In those cases, a QCD’s state benefit may be redundant—though it still helps federally, which is usually the larger tax bite.

The key takeaway is most states do not tax QCD amounts since they either follow the federal definition of income or already don’t tax retirement income.

However, a few states may still include that amount in state income, reducing the overall benefit slightly. Even in those cases (like NJ), the federal tax savings from a QCD are often much more significant than any state tax cost.

Always double-check your own state’s tax guidelines or consult with a tax professional. For the majority of readers, if your QCD is tax-free on your federal return, you’ll find it’s also tax-free on your state return. But knowing the exceptions (like NJ’s policy or NC’s change) can prevent surprises.

One more thing: No matter the state, never attempt to deduct a QCD as a charitable contribution on the state return. Sometimes people are confused if their state doesn’t recognize the QCD exclusion – they think maybe they can take a deduction instead.

Generally, if a state taxes the distribution, it will also allow a charitable deduction (if the state has itemized deductions) for the contribution, but you’d need to itemize on the state return. This gets complicated, which is another reason it’s best if the state just conforms to federal and treats the QCD as excluded. When in doubt, seek state-specific tax advice to navigate these nuances.

Recent Changes and Future Outlook 🔮

QCDs have been around for several years, but the laws do evolve. Staying informed can help you plan better:

• SECURE Act Changes: The original SECURE Act (enacted in late 2019) increased the RMD starting age from 70½ to 72, and the recent SECURE 2.0 Act of 2022 further raised it to 73 (for those born 1951-1959) and eventually 75 (for those born 1960 or later). Notably, these changes did not raise the QCD age – it’s still 70½.

• This means there’s now a gap: you can start doing QCDs at 70½ even though you might not have to take RMDs until 73+. This was actually intentional, to encourage charitable giving. So a person could do QCDs in their early 70s before RMDs kick in, thereby reducing their IRA balance and future RMDs.

• Inflation Indexing of QCD Limit: Starting in 2024, the $100,000 annual limit on QCDs will be indexed for inflation. That’s why you might see references to a $105,000 limit – the cap will go up over time.

• This is great for those who want to give more as the cost of living rises. Keep an eye on the exact limit each year; the IRS will announce the updated figure (for example, it’s $105,000 per person for 2024).

• One-Time QCD to Split-Interest Entity: SECURE 2.0 also introduced a new one-time opportunity. Individuals can make a one-time QCD (up to $50,000) to fund a charitable remainder trust (CRT) or a charitable gift annuity (CGA). This is a more complex giving strategy that provides the donor (or another beneficiary) with income for life, with the remainder going to charity.

• The $50k counts toward your QCD limit in that year, and you can only do this once in your lifetime. While this is beyond the scope of our 401(k) question, it shows Congress is open to expanding how QCDs can be used (still, notably, only from IRAs).

• No Expansion to 401(k)s Yet: Despite some of these enhancements, Congress has not changed the rule about 401(k)s. QCDs are still IRA-only. There hasn’t been significant public push to allow QCDs directly from 401(k)s, possibly because the workaround (rollover to IRA) is available. Could this change in the future? It’s possible but not currently on the legislative radar.

• Future Outlook: The QCD provision has strong support because charities love it and it’s seen as a win-win. It’s now a permanent part of the tax code. Future changes might further increase limits or allow more flexibility, but at the same time, lawmakers will be cautious about any “loopholes.” If you’re doing long-term planning, it’s reasonable to assume QCDs will remain available and perhaps even more generous, but always keep up with tax law updates.

• And remember, if you leave your IRA to a charity at death, that’s not a QCD but it is another way to ensure those funds go tax-free to charity (retirement accounts are great assets to leave to charities in your will because they won’t owe income tax on them).

In summary, QCDs have only gotten more useful over time (with inflation indexing and new options). The restriction against 401(k) QCDs is still there, so using an IRA as the conduit remains the plan for those funds. Stay tuned to any new tax bills, but meanwhile, you can plan with confidence using the rules we’ve discussed.

Avoid These Common Mistakes 🚫

Even with all this knowledge, there are some common pitfalls when using QCDs or trying to make charitable gifts from retirement accounts. Here are mistakes to avoid:

1. Trying to QCD directly from a 401(k) (or 403(b)):
We’ve hammered this point, but it bears repeating: you cannot do a QCD from a 401(k) or similar employer plan. A surprising number of people hear about QCDs and mistakenly think it applies to all retirement accounts.

If you attempt it, you’ll just end up with a taxable distribution. The fix: Roll over the funds to an IRA first, then do the QCD from the IRA. Don’t have the 401(k) send money straight to a charity unless you’re okay with it being treated as a taxable withdrawal.

2. Ignoring the Age Rule (70½):
The QCD eligibility age is 70½. That means if you are, say, 70 years and 4 months old, you have to wait two more months. Some folks try to make a QCD in the year they turn 70, not realizing they have to hit that half-year mark.

Also, the distribution must occur on or after the day you turn 70½. If you schedule it too early, it won’t count. Tip: If you’re planning a QCD in the year you hit 70½, double-check the date – many custodians will actually verify your birthdate for QCD eligibility to prevent mistakes.

3. Taking the Distribution Yourself and Then Donating:
This is a very common mistake. A person withdraws money from their IRA to their bank account and then writes a check to a charity, thinking it’s a QCD. Unfortunately, that doesn’t count as a QCD. In that scenario, the IRS sees a normal taxable distribution (to you) and a separate donation.

You can still deduct the donation if you itemize, but you lost the QCD benefit. To be a true QCD, the money must go directly to the charity. Avoidance: Arrange the transfer through your IRA custodian so that the check is made out to the charity (or use the custodian’s QCD distribution form). Do not deposit the funds into your own account first.

4. Forgetting to Report the QCD Properly on Your Tax Return:
Even though QCDs are tax-free, they still need to be reported. Your IRA custodian will send a 1099-R that just shows a distribution. It’s up to you to indicate that some or all of that distribution was a QCD.

A mistake here could make the IRS think you owe tax. Typically, on Form 1040, you’ll put the total IRA distribution on one line, then the taxable amount on the next line (which could be zero if it was all QCD), and write “QCD” next to it. If you use tax software or a tax preparer, make sure they know you did a QCD. Double-check: Many tax programs have a checkbox or question about “Did you donate directly from your IRA to charity?” – ensure it’s answered correctly.

5. Exceeding the QCD Limit:
If you give more than the allowed QCD limit (e.g., you try to QCD $120,000 when the limit is $100,000), the excess will simply be treated as a normal taxable distribution (and a normal donation if you gave it to charity).

Also, the limit is per person, not per IRA. If you’re married, you each get your own $100k (assuming you both are 70½+), but you can’t combine it to give, say, $200k from one person’s IRA. Plan accordingly: If you want to give above the limit, you might do $100k this year and the rest early next year, or use other assets for the surplus.

6. Donating to an Ineligible Recipient:
Not every charitable vehicle qualifies for QCD. The big no-nos are donor-advised funds (DAFs) and private foundations. Also, charitable gift annuities or trusts (except for that new one-time $50k option) aren’t allowed via QCD.

Some people make the mistake of trying to send their QCD to their DAF at a community foundation – the IRA custodian might even process it, but it will be a problem if audited. Stick to eligible charities: 501(c)(3) public charities are the safest bet. If you’re not sure, ask the charity or your advisor before doing the transfer.

7. Not Considering the First RMD in a 401(k) Before Rollover:
We mentioned this in strategy, but it’s a mistake worth highlighting. Suppose you waited until 74 to roll over your old 401(k) to an IRA, and you hadn’t taken any RMDs yet thanks to the “still-working” exception or a grace period.

The very act of rolling over doesn’t erase the fact that once you left the job, an RMD was due for that year. A lot of people get tripped up by the rule that you can’t roll over a required minimum distribution. If an RMD is due from a 401(k) in a given year, that amount is not eligible to be rolled into an IRA – you must withdraw it (and pay tax, or donate it via the normal method of deduction).

So: If you’re transitioning from a 401(k) to an IRA in your 70s, make sure you satisfy any pro-rata RMDs from the 401(k) first, then roll the rest and use QCDs going forward.

8. Attempting a QCD from Roth IRA (and other quirky moves):
Technically, QCDs can come from Roth IRAs too, but this is usually a mistake or misunderstanding. Roth IRA withdrawals are already tax-free (if you follow the rules), and original Roth owners have no RMDs.

There’s typically no tax reason to do a QCD from a Roth – you’d just withdraw and donate if you wanted, or better yet, leave the Roth to grow or to heirs. Similarly, some folks with after-tax money in their traditional IRA worry about how QCDs apply. The IRS treats QCDs as coming first from the taxable portion of your IRA (which is good).

If you have a mix of pre-tax and post-tax dollars in your IRA, a QCD will count against the pre-tax portion. Don’t try to game it by thinking you can “QCD my non-taxable basis” – it doesn’t work that way.

Keep it simple: Use traditional IRAs for QCDs, and if you have an after-tax basis, know that QCD will utilize the taxable portion, preserving your after-tax basis for future withdrawals (which you can still recover tax-free proportionally in other distributions).

By avoiding these mistakes, you can ensure that your charitable giving through QCDs goes smoothly and delivers the maximum benefit. When in doubt, consult a qualified tax advisor or financial planner.

QCDs are a fantastic tool, but the details matter – a small oversight can turn a tax-free gift into a taxable event. With careful execution, you’ll be able to support your favorite causes and save on taxes, truly a rewarding combination.

FAQ 🤔

Q: Can I make a Qualified Charitable Distribution directly from my 401(k) account?
A: No, you cannot make a QCD directly from a 401(k) or other employer plan; only IRA accounts are eligible for QCD treatment under current law.

Q: Is there a way to use my 401(k) money for QCDs at all?
A: Yes, by rolling over 401(k) funds into a traditional IRA, you can then make QCDs from that IRA. A direct rollover is not taxable, and it enables you to use the QCD benefit afterward.

Q: Do QCDs count toward my required minimum distribution (RMD)?
A: Yes, any amount you donate as a QCD from your IRA counts toward satisfying that year’s RMD for the IRA. (Keep in mind, a QCD from an IRA won’t satisfy a 401(k)’s RMD – those are separate.)

Q: Are QCDs limited to $100,000 per year forever?
A: No, the $100,000 annual limit is now indexed for inflation. It can increase over time (for example, to about $105,000 for 2024). Always check the current year’s limit when planning large gifts.

Q: Can I do a QCD if I don’t itemize my taxes?
A: Yes, you can absolutely use a QCD without itemizing. In fact, that’s one of the biggest advantages of QCDs – you get a tax benefit for your charitable gift even if you take the standard deduction.

Q: Can someone younger than 70½ do a QCD from their IRA?
A: No, QCDs are only available once you reach age 70½. If you’re younger, any withdrawal and donation will be treated as taxable income and a separate deduction (if you itemize).

Q: If I accidentally took a distribution myself and then gave it to charity, can I fix it as a QCD?
A: No, unfortunately once the funds are in your hands (or bank account), it can’t be designated a QCD. You can still donate the money and potentially deduct it, but that won’t undo the taxable distribution. Always ensure the check is made out directly to the charity to qualify as a QCD.

Q: Do I owe state taxes on a QCD?
A: Generally no. Most states honor the federal exclusion for a QCD, meaning it won’t be counted as income on your state return. However, a few states may add it back. It’s best to check your state’s rules, but for most people there’s no state tax on QCD amounts.

Q: Can I choose any charity for a QCD, like my donor-advised fund or private foundation?
A: No, QCDs must go to qualifying public charities. Donor-advised funds, private foundations, and certain other entities are not eligible. Make sure the recipient is a 501(c)(3) public charity that is not disqualified under the QCD rules.

Q: Is a Roth IRA also eligible for QCDs?
A: Yes, a Roth IRA owner over 70½ could do a QCD, but it’s usually not beneficial. Roth distributions are typically tax-free already, and Roth IRAs have no RMDs while the owner is alive. It wouldn’t make sense to use up Roth funds for a QCD when you could use taxable IRA funds instead. Generally, stick to traditional IRAs for QCDs unless you have a special situation.

Q: Should I consult a professional before doing a QCD or rollover?
A: Yes, especially if it’s your first time. While many people handle routine QCDs on their own, involving a financial advisor or CPA can provide clarity on timing (e.g., RMD issues, rollover coordination) and ensure you’re following all the steps correctly. A short consultation can help you avoid the mistakes mentioned above and optimize your charitable impact.