401(k)s and Qualified Charitable Donations

You can’t make QCDs directly from your 401(k), but you can use a workaround

Qualified charitable donations (QCDs), also called qualified charitable distributions, are a way to donate some of your retirement savings to charities while lowering your tax bill. A QCD is when you donate distributions from a retirement account to a qualified charitable organization and then deduct it from your taxable income.

You can use this strategy with traditional individual retirement account (IRA) distributions, but not with 401(k) distributions. So if you want to donate your 401(k) funds to charity, you’ll either have to pay tax on it first or roll it over into an IRA.

Here, we’ll look in more detail at the rules for QCDs and 401(k) distributions and how you can take advantage of QCD benefits no matter your retirement account type.

Key Takeaways

  • Distributions from traditional individual retirement accounts (IRAs) and 401(k)s are generally taxable.
  • You must take required minimum distributions (RMDs) from a traditional IRA or 401(k) at age 73 or 75, depending on your birthday.
  • You don’t pay taxes on RMDs from a traditional IRA when you use them to make a qualified charitable donation (QCD).
  • You can’t make a QCD directly from your 401(k), but you can roll over your funds to an IRA and then make a donation.

How Qualified Charitable Donations/Distributions (QCDs) Work

With some types of retirement plans, including traditional IRAs and 401(k)s, you must generally start taking required minimum distributions (RMDs) and paying tax on them once you reach a certain age. Making a QCD is a way of contributing some of that money to a charity without having to pay tax on it.

You generally must start taking RMDs from an IRA or 401(k) when you turn 73 if you were born between 1951 and 1959 or 75 if you were born in 1960 or after. This is an increase from 72 after the passing of the SECURE 2.0 Act in December 2022.

With Roth IRAs and Roth 401(k)s, you make contributions with after-tax funds and make withdrawals tax-free, but these two account types have different withdrawal rules. You are not required to take RMDs during your lifetime with a Roth IRA, but with a Roth 401(k), you are required.

To make a QCD, you instruct your IRA trustee to pay the money directly to the qualified charity. You can donate up to $100,000 each year as of 2021. Your spouse can also make a QCD from their own IRA, if they’re eligible, also up to $100,000, for a total maximum of $200,000 if you file jointly.

All contributions and earnings that accumulate inside a traditional IRA are eligible for QCDs. Roth IRAs generally are not eligible for QCDs because the distributions are already not subject to income tax; however, you can make QCDs from other types of IRAs, including:

  • Rollover IRAs
  • Inherited IRAs 
  • Simplified Employee Pension (SEP) IRAs (inactive plans only) 
  • Savings Incentive Match Plan for Employees (SIMPLE) IRAs (inactive plans only)

While you can’t make a QCD directly from any type of 401(k) account, you may be able to roll over your 401(k) assets into an IRA and then make a QCD. Whether you’ll owe tax on the rollover will depend on the type of IRA—traditional or Roth.

Rolling Over a 401(k) to an IRA

You may consider rolling the money in your 401(k) plan into an IRA when you change jobs or retire. That way, you can take control of the money while also maintaining its tax-advantaged status. Either way, you’ll be subject to RMDs at a certain age—either 73 or 75, depending on your birthday, as noted above.

A rollover won’t have any tax consequences if the money goes into a traditional IRA and if you follow the rules; however, if you roll over funds from a traditional 401(k) into a Roth IRA, you will have to pay income taxes on that money.

Once the money is in the IRA (and once you’ve reached the age for RMDs), you can use it to make a QCD.

Other Tax-Wise Ways To Give to Charity

You can donate to charity in many other ways as well. For example, once you’ve reached age 59½, you can take penalty-free distributions from your 401(k) and then donate directly to any charity. You’ll have to pay income tax on distributions from a traditional 401(k), but not from a Roth 401(k).

You may be eligible for a tax deduction if you itemize your taxes. If you make a qualifying contribution, which is a cash contribution to a qualifying charity, you can generally deduct them for up to 60% of your adjusted gross income, although the Internal Revenue Service (IRS) may temporarily lift those limits—as it did during the COVID-19 pandemic.

You can also donate appreciated securities, such as stocks, to a charity. With this strategy, you wouldn’t owe capital gains tax on the securities, as you would if you simply sold them and donated the cash. In addition, you would be eligible for a tax deduction equal to their full market value.

What Is an Inactive SEP or SIMPLE IRA?

An inactive SEP (Simplified Employee Pension) or SIMPLE (Savings Incentive Match Plan for Employees) IRA is two types of individual retirement accounts to which the employer no longer makes contributions. You can make qualified charitable distributions or donations (QCDs) from an inactive SEP or SIMPLE IRA by using your distributions to donate to a qualified charity and then take a tax deduction.

Can You Get a Charitable Tax Deduction With a QCD?

While you can deduct an IRA distribution that you contribute to a qualified charity with a QCD, you cannot also claim a charitable contributions deduction. The Internal Revenue Service (IRS) has annual caps for how much you make with charitable contributions deductions. Those donating beyond those caps may want to consider QCDs, which allow for up to $100,000 in deductible donations through your retirement account distributions.

What Is a Charitable IRA Rollover?

A charitable IRA rollover is basically another name for a QCD. With this strategy, you can use your IRA distributions, including your required minimum distributions (RMDs), to make a contribution to a qualified charity and then claim an income tax deduction.

The Bottom Line

The rules on traditional IRAs and 401(k)s mandate RMDs, generally starting when you turn 73 or 75 years old, depending on your birthday. A QCD is a way to get tax advantages for your charitable contributions. QCDs can be made from various types of IRAs, but not directly from a 401(k) plan; however, if you rollover your 401(k) into an IRA, you can then make QCDs from that account.

Article Sources
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