Legacy IRA QCD: Rules for Charitable Donations
For beneficiaries, an inherited IRA presents a unique pathway for philanthropy. Understand how this strategy can satisfy RMDs and reduce your taxable income.
An inherited Individual Retirement Arrangement (IRA), or legacy IRA, is a retirement account that passes to a beneficiary after the owner’s death. For charitably inclined beneficiaries, this inheritance presents a financial planning opportunity. A strategy known as a Qualified Charitable Distribution (QCD) allows for a direct transfer of funds from the IRA to a qualified charitable organization. This transaction offers a tax advantage because the distributed amount is excluded from the beneficiary’s taxable income for the year.
Eligibility for Making a QCD from an Inherited IRA
To make a Qualified Charitable Distribution from an inherited IRA, the beneficiary must be at least 70½ years old when the distribution is made. This age requirement applies to the beneficiary, not the original owner. Both spousal and non-spousal beneficiaries are eligible, provided they meet the age threshold. For instance, a 68-year-old who inherits an IRA must wait until they turn 70½ to make a valid QCD.
The type of inherited IRA also affects eligibility. QCDs can be made from traditional IRAs, rollover IRAs, and inactive SEP and SIMPLE IRAs, where an inactive plan is one no longer receiving employer contributions. If a beneficiary inherits a 401(k) or other employer-sponsored retirement plan, they cannot make a QCD directly from that account. The beneficiary must first roll over the funds into an inherited IRA to use the QCD strategy.
Rules and Tax Implications of the Distribution
The Internal Revenue Service (IRS) sets an annual limit on the total amount an individual can contribute via QCDs, which is $108,000 for 2025. This per-person cap is indexed for inflation and applies across all of an individual’s IRAs. The main tax benefit is that the distributed amount is excluded from the beneficiary’s adjusted gross income (AGI). This is more advantageous than taking a taxable distribution and claiming a charitable deduction, as many taxpayers who take the standard deduction would otherwise lose this tax benefit.
An advantage of using a QCD from an inherited IRA relates to Required Minimum Distributions (RMDs). A QCD can satisfy an RMD obligation up to the amount of the charitable gift. For instance, if a beneficiary has a $10,000 RMD and directs a $10,000 QCD to a charity, they have fulfilled their RMD for the year without that amount being included in their taxable income.
To qualify, the donation must be made directly from the IRA custodian to an eligible 501(c)(3) organization. Distributions to private foundations and donor-advised funds do not qualify for QCD treatment. The beneficiary cannot receive any benefit in return for the donation; for example, the funds cannot be used to purchase an item at a charity auction.
The SECURE 2.0 Act One-Time Election
The SECURE 2.0 Act introduced a one-time opportunity for individuals to make a special type of QCD. This provision allows for a single, lifetime election to distribute up to $54,000 in 2025 to a split-interest entity. This amount is part of the overall annual QCD limit and is adjusted for inflation in future years.
A split-interest entity is a vehicle that provides financial benefits to both a charity and a non-charitable beneficiary, such as the donor. Common examples include Charitable Gift Annuities (CGAs) and Charitable Remainder Trusts (CRTs). These arrangements involve the donor transferring assets, which then provide an income stream back to the donor for a set period or for life.
The amount transferred to the split-interest entity is not included in the donor’s income. However, the donor does not receive an additional tax deduction for the charitable portion of the gift. This election can only be made in one tax year during an individual’s lifetime.
How to Execute and Report the QCD
To make a QCD, the beneficiary must instruct the financial institution that is the custodian of the inherited IRA to make a direct transfer to the chosen 501(c)(3) organization. The check must be made payable directly to the charity. The IRS also requires the donor to obtain a written acknowledgment from the charity for the contribution. This receipt must state the date and amount of the gift and confirm that no goods or services were received in exchange. The beneficiary is responsible for securing and retaining this documentation for their tax records.
The IRA custodian will issue a Form 1099-R reporting the total distribution, which for an inherited IRA is reported with code 4 in Box 7. When filing a federal income tax return, the beneficiary reports the total distribution on line 4a of Form 1040. On line 4b, for the taxable amount, the beneficiary enters zero if the entire distribution was a QCD and writes “QCD” next to the line to inform the IRS.