IRS Forbids Using Your IRA to Give to a Donor-Advised Fund

Individual Retirement Accounts (IRAs) offer tax advantages for retirement savings, but strict rules govern how funds can be used. Some account holders consider donating IRA assets to charity through a donor-advised fund (DAF), which allows donors to manage charitable giving over time. However, the IRS prohibits this type of contribution.

IRS Rule on Donor-Advised Funds

The IRS explicitly bars individuals from using their IRA to contribute to a donor-advised fund, as outlined in Section 408(d)(8) of the Internal Revenue Code. This rule applies to qualified charitable distributions (QCDs), which allow individuals aged 70½ or older to donate up to $100,000 per year directly from their IRA to eligible charities without counting the distribution as taxable income. While QCDs provide a tax-efficient way to support charities, donor-advised funds do not qualify.

The restriction is due to the nature of donor-advised funds. Unlike direct donations to public charities, contributions to a DAF allow donors to recommend how and when funds are distributed. Because donors retain influence over the assets, the IRS does not consider these contributions immediate charitable gifts, a requirement for QCD eligibility. QCDs must be irrevocable transfers that provide an immediate benefit to a charitable organization.

Why Donor-Advised Funds Are Not Eligible

The primary issue is donor control. When funds are placed into a DAF, the contributor can recommend grants to specific charities over time. This ongoing influence makes DAFs different from direct charitable contributions, which must be irrevocable to qualify as QCDs.

The IRS also considers the potential for personal benefit. Since DAF sponsors allow donors to participate in advisory roles, there is a risk that funds could be directed in ways that benefit the donor or their family. For example, a donor could recommend grants to organizations where they serve as board members or where family members are employed. This conflicts with the intent of QCDs, which must provide an immediate and unconditional benefit to a qualified charity.

Another issue is the timing of charitable distributions. Direct gifts to public charities immediately qualify for tax deductions, while contributions to a DAF may remain undistributed for years. This delay is inconsistent with the requirement that QCDs be direct, immediate transfers that reduce the IRA owner’s taxable income in the same year the distribution is made.

Consequences of Noncompliance

Attempting to contribute IRA funds to a donor-advised fund can lead to significant tax consequences. Since the IRS does not recognize these transfers as QCDs, the full amount will be treated as a taxable withdrawal, increasing the account holder’s adjusted gross income (AGI) and overall tax liability. For retirees, this unexpected income could also affect the taxation of Social Security benefits and eligibility for certain deductions or credits.

Individuals under 73 must also consider the impact on required minimum distributions (RMDs). If an IRA owner incorrectly assumes a transfer to a donor-advised fund satisfies their annual RMD, they may fail to withdraw the correct amount, triggering a penalty. Under current tax law, the IRS imposes a 25% excise tax on any shortfall in RMDs, which can be reduced to 10% if corrected in a timely manner. This penalty can be costly, particularly for those with large retirement account balances.