For taxpayers who are charitably inclined and who face traditional IRA required minimum distributions (RMDs), the qualified charitable distribution (QCD) is a great tax planning strategy. It allows you to avoid taxable income on the RMD, meaning:
- Lower adjusted gross income (AGI)
- Lower taxable Social Security
- Lower estimated tax payments if AGI is less than $150,000
- Lower income-related monthly adjustment amount (IRMAA), which can increase the fee that’s added to Medicare Part B and Part D premiums for individuals with higher income
- Lower taxable income
But the fact that the tax code requires a direct transfer of the QCD from the IRA to the charity complicates the process.1 And those complications make some taxpayers shy away from the QCD, which can be highly beneficial.
But there is a way to simplify the process: Use a traditional IRA checking account to make QCDs.
Not all IRAs offer this option. Further, you cannot use a checking account when using what is often called the “checkbook IRA.” Let us clarify.
There are two important distinctions to make regarding checkbooks and QCDs:
- Check written from an IRA. According to IRS Notice 2007-7, an IRA check written to a qualified charity by the IRA owner from the traditional IRA account can be considered a QCD issued by the trustee.2 Therefore, you can write a check from such an account to a qualified charity and characterize it as a QCD.
- Self-directed IRA LLC checkbook. When it comes to using a self-directed IRA LLC checkbook, the situation is different. QCDs must be made directly by the trustee of the IRA to the charity. Since the LLC is a separate entity from the IRA itself, writing a check from the LLC does not qualify as a direct transfer from the IRA
So, step one in your ability to use an IRA check to make a QCD is to have the checking account set up for a regular IRA, not a self-directed IRA LLC.
Also, there’s a huge difference in the complications of setting up the self-directed IRA LLC and the simple IRA checking account with a brokerage firm such as Schwab or Fidelity.
A second complication is making sure that the charity (1) receives your check and (2) cashes it before December 31. You need both in order to have a QCD for the year. There’s no such complication with a trustee-to-charity transfer.
The third complication is making sure that your QCD qualifies as a charitable contribution. In general, this means you3
- paid the money to a Section 501(c)(3) organization such as your church, a school, the Red Cross, or some other charity;
- received no benefits from the organization for your contribution, such as a meal at a charity function; and
- have a receipt from the charity for any contribution of $250 or more, acknowledging your donation and stating that you received no benefits in return.
Takeaways
QCDs offer a powerful tax-saving opportunity for IRA owners who must take RMDs.
By directing distributions to a qualified charity, you can reduce taxable income, potentially lower Medicare premiums, and ease your overall tax burden.
While QCDs must be made as direct transfers from the IRA to the charity, using a traditional IRA checking account—offered by some custodians—can simplify the process.
But this strategy does not work for self-directed IRA LLCs.
To ensure your QCD counts, make sure it’s properly timed, sent to a qualified 501(c)(3) charity, and documented with a receipt.
1IRC Section 408(d)(8)(B)(i).
2Notice 2007-7, Q&A 41. See also IRS News Release 2022-201.
3IRC Sections 170(a); 170(c); 170(f)(8).