The QCD Dance
Tis the season for giving, and qualified charitable distributions (QCDs) are a popular way to donate to a favorite charity. However, rules must be followed. In a recent article (“QCD Timing,” December 4), included was the following closing line: “Some IRA accounts allow check-writing privileges. Checks written to a charity from a ‘checkbook IRA’ qualify as a valid QCD. However, the custodian may not recognize the distribution until the check is cashed! That could be in early 2025…and then we have problems.”
What are these “problems” alluded to? If a QCD check is not cashed by the charity until early 2025, it will not count for a 2024 QCD. It does not matter that the check was written or dated in late 2024. The distribution must leave the IRA (i.e., the check must be cashed) by December 31. The custodian cannot and will not police when the check was delivered to the charity. The custodian can only monitor and report when the check is cashed, thereby initiating the actual distribution from the account.
If the QCD check written in late 2024 results in a distribution not officially being executed until early 2025, there are additional potential pitfalls to dance around. For example, if the intent was to use the QCD to offset all or a portion of a 2024 required minimum distribution (RMD), then we have a missed RMD situation. A penalty of 25% could apply if proper corrective action is not taken, and that is a scenario no one wants to tango with.
Additionally, with the QCD intended for 2024 being pushed into 2025, that QCD amount eats into the 2025 QCD cap of $108,000. If the IRA owner wants to donate the full amount to charity in 2025, the late-cashed check (intended for 2024) will have the unintended consequence of cutting into the 2025 QCD cap.
Note that QCDs still cannot be done from work plans like a 401(k). The QCD must come from an IRA. This rule leaves some donors scrambling to find a partner, and makes wallflowers out of others with no options. For any retirees turning 73 in 2025 who still have dollars in their 401(k), those plan assets must be moved to an IRA before the end of 2024 if the goal is to offset future RMDs with a QCD. Why the urgency? For anyone (not still working) who turns 73 in 2025, the first RMD year will be 2025. Rolling the 401(k) to an IRA next year and THEN offsetting the plan RMD with a QCD from the IRA will not work. RMDs cannot be rolled over. If you wait until 2025, the 2025 plan RMD must be withdrawn prior to the rollover, thereby eliminating the ability to offset that RMD with a QCD.
For those retired 401(k) participants who are already age 73 or older, the 2024 music has already stopped. You must take your 2024 plan RMD before doing any rollovers to an IRA. As such, the 2024 RMD must be withdrawn from the plan and cannot be offset with a QCD.
Of course, going forward, all will be well. With all plan dollars rolled over to an IRA, future IRA RMDs can be sent to whatever qualifying charity you wish via QCD. But until the plan dollars are in that IRA, we must do this plan RMD/rollover timing/QCD dance.
By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.