Can You Do a QCD from an Inherited IRA?

Inherited IRAs can be an invaluable asset for the surviving family members of the deceased IRA owner. However, one of the decisions that beneficiaries must make is how and when to take distributions from the inherited IRA. One of the distribution options that beneficiaries may have is a Qualified Charitable Distribution (QCD). But, can you do a QCD from an inherited IRA?

You can do a Qualified Charitable Distribution (QCD) from an inherited IRA. An individual can contribute up to $105,000 per year in QCD, or $210,000 for married couples, as long as you meet certain requirements. For example, you must be at least 70 ½ or older to make a QCD, and the distribution amount is limited to the amount that would be taxed as ordinary income.

What is a Qualified Charitable Distribution?

A Qualified Charitable Distribution is a direct transfer of funds from a traditional IRA, rollover IRA, inherited IRA, or SEP IRA to a qualifying charitable organization. When you make a QCD, the distribution is excluded from your taxable income, unlike other IRA withdrawals taken during the year.

A QCD also counts towards your Required Minimum Distributions (RMDs) for the year. For the QCD to count towards the RMD for the year, you must make the distribution by the RMD deadline, usually December 31 of that year. Be aware that distributions above your RMD will not count towards your future RMDs.

If the inherited IRA assets are more than you need for your personal use, a QCD allows you to donate to charity to reduce your tax burden for the year. This may help if the expected RMDs may push you to a higher tax bracket.

How Do QCDs Work?

When making a QCD, the funds must be distributed directly from your IRA custodian to the charity. If the funds are distributed directly to your account, and then you donate it, it will not qualify as a QCD.

The IRS requires that for the distribution to be eligible for tax exemption, it must not pass through your hands. You can provide instructions to the IRA custodian, who will then transfer the money directly to the selected charity. The IRA can transfer the funds either via electronic transfer or mailed check directly to the charity.

You can make one large contribution to one charity or several smaller contributions to several charities during the year. The amount you can contribute to charity is capped at $105,000 per year as long as you are at least 70 ½ or older. If you are married, each spouse can contribute up to the $105,000 limit, totaling $210,000.

Requirements to Make a QCD from an Inherited IRA

The IRS provides specific requirements that donors must meet to be eligible to make a QCD. First, to make a QCD contribution from an inherited IRA, the beneficiary must be at least age 70 ½ at the time the distribution is made. If you are below age 70 ½, you won’t be eligible to make a QCD contribution, even if the original IRA owner was at least 70 ½. 

For example, if the original IRA owner was 70 ½ at the time of death, and you are 68, you must wait until you reach age 70 ½ to make a QCD contribution. Also, if the original IRA owner was 68 at the time of death, and you are 70 ½, you can make a QCD contribution to a charity.

Additionally, the QCD must come from a traditional IRA or inherited IRA, and the distribution must be made directly to the qualified charity. These distributions can also come out of SEP IRA and SIMPLE IRA as long as no employer contributions were made to the account in the year of the distribution. While Roth IRAs are eligible for QCDs, there won’t be any tax benefit since qualified Roth IRA distributions are tax-free.

While distributions from a 401(k) are not allowed, they may be allowable in certain situations if you move a portion of the 401(k) money into a rollover IRA, and then make a qualified charitable distribution from the account.

What Charities Qualify for QCD?

QCD contributions can only be made to certain types of charities. Eligible organizations must be 501(c)(3) organizations, which are eligible to receive tax-deductible contributions.

Examples of eligible public charities include non-profit hospitals, educational institutions, churches, etc. However, certain charity organizations like private foundations and donor-advised funds do not qualify for QCD.

Additionally, donors cannot receive any benefit in return for making a qualified distribution to a charity. For example, you cannot use the QCD contribution to purchase an item at the charity auction.

If you plan to use the QCD contribution to reduce your tax liability for the tax year, you should confirm that the charity organization you want to donate to is eligible. Be aware that QCD contributions made to an ineligible charity will be counted as a regular distribution, subject to income taxes. You should consult the charity before donating to confirm it is eligible for QCD.

Tax reporting for Inherited IRA QCD contributions

When you take a distribution from your IRA account, your IRA provider will issue a Form 1099-R to you and the IRS, showing the total distributions taken from the account during the year. There is no special coding for QCDs on this tax form, and you will be required to report the QCD contribution appropriately on your annual tax return.

When filing your annual return, you should report the total distribution amount on Line 4 of Form 1040. If the total IRA distribution for the year is a QCD, you should enter this amount on Line 4a. In the case of a QCD, the taxable amount should be zero, and you should enter 0 on Line 4B, and write the label "QCD" next to Line 4b. This label ensures that the IRS recognizes that the distribution was made to a qualified charity, and should be excluded from your tax return.

If only part of the IRA distribution for the year was a QCD, you should enter the total amount of the IRA distribution on Line 4a, and the remaining taxable portion of the IRA distribution on Line 4b.

Qualified charitable organizations that received the donation may provide an acknowledgment receipt of the payment, which can be included with your tax filing as proof of the QCD contribution.