The end of the year is full of checklists and activities. Whether someone is celebrating the holidays or making sure finances are in order, one thing is certain: December 31 comes quickly for everyone. It is prudent to start early and be methodical when planning for the year ahead. Beginning in January with periodic contributions is often the easiest way to maximize contributions, though this is not always feasible or efficient. Another strategy to consider is a tax-efficient approach that fulfills required distributions while allowing a charity to receive the full benefit without taxation. Qualified charitable distributions (QCDs) are transferred directly from an individual’s IRA and are excluded from the donor’s taxable income. When executed correctly, QCDs provide benefits for both the donor and the charity.

When processing a QCD, age is an important factor. The individual must be at least 70½ on the date of the distribution. This differs from other strategies that require reaching a certain age by year-end. Additionally, QCDs are capped by the IRS. For 2025, each spouse in a married couple filing jointly may contribute up to $108,000 individually (inflation adjusted from $100,000 in prior years). This limit applies per person and cannot be transferred between spouses.

The type of retirement account also affects QCD eligibility. Start by identifying whether the account is an active employer-sponsored plan. Typical employer-sponsored accounts such as 401(k)s, 457s, and 403(b)s are not eligible for QCDs. Employer plans also have delayed contribution deadlines, such as employer matching, which further complicates eligibility. This restriction extends to SIMPLE and SEP IRAs while they are receiving employer contributions. However, if no employer contributions have been made during the year, a QCD from a SIMPLE or SEP IRA may be processed.

Traditional IRAs, inherited IRAs, and rollover IRAs are all eligible for QCDs. Once an individual reaches the required minimum distribution (RMD) age, QCDs can satisfy the RMD up to the allowable limit. It is important to note, however, that a QCD from an inherited IRA does not satisfy the RMD for a traditional or rollover IRA, and vice versa. While Roth IRAs are technically eligible, QCDs are usually unnecessary because Roth distributions are already tax-free when qualified. The only case where a Roth QCD is useful is when the distribution would otherwise be non-qualified.

The type and status of the charity is also critical. To be considered qualified, the organization must be based in the United States, registered as a 501(c)(3) nonprofit, operate as a public charity, and not provide benefits back to the donor. The best way to confirm eligibility is to contact the charity directly. Once eligibility is confirmed, reach out to the IRA custodian to initiate the transfer. In practice, it may be helpful to contact the custodian first, since they will require specific account details from the charity. After processing, the IRA trustee will issue Form 1099-R for tax reporting.

As always, it is important to consult a tax or investment professional before making these important decisions.

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