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Can A QCD Go to a Donor-Advised Fund?

Can A QCD Go to a Donor-Advised Fund?

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Although it may not seem obvious, charitable giving plays an important role in retirement planning, offering retirees a way to support meaningful causes while optimizing their financial strategies. Among the tools available, Qualified Charitable Distributions (QCDs) and donor-advised funds (DAFs) stand out as popular options, often sparking curiosity about how they might work together. Retirees and advisors frequently ask: “Can a QCD go to a donor-advised fund?” This question is more than academic—it touches on tax efficiency, compliance, and the mechanics of philanthropy in retirement.

Understanding the rules surrounding QCDs is the ultimate key to your success. For retirees over 70½, QCDs can serve as a powerful tax strategy, reducing taxable income while fulfilling charitable goals.1 However, IRS regulations set strict boundaries on how and where these distributions can be directed.2 Missteps can lead to lost tax benefits or penalties, making clarity important. In this article, we’ll explore what QCDs and DAFs are, address whether they can be combined directly, and outline alternative approaches for retirees seeking to optimize their giving.

What Is a Qualified Charitable Distribution (QCD)?

A Qualified Charitable Distribution (QCD) is a direct transfer of funds from an Individual Retirement Account (IRA) to a qualified charity.1 Unlike typical withdrawals, the funds never pass through the account holder’s hands—they go straight to the charity. To qualify, the IRA owner must be at least 70½ years old at the time of the distribution.2 The IRS caps QCDs at $100,000 per individual per year, adjusted periodically for inflation,3 and only certain charities—typically public charities under IRS Section 501(c)(3)—are eligible.4

Tax Advantages of a QCD

QCDs offer distinct tax benefits, especially for retirees subject to Required Minimum Distributions (RMDs). The amount transferred counts toward the RMD, reducing the taxable income reported on the individual’s return.1 For example, if your RMD is $20,000 and you direct $10,000 as a QCD, only $10,000 of the distribution is taxable. This contrasts with taking a full withdrawal and then donating cash, where the entire RMD is taxed upfront, and a charitable deduction must be claimed separately (if itemizing).5 QCDs simplify the process and can benefit those who don’t itemize deductions, especially under the current standard deduction rules.6

Overview of Donor-Advised Funds (DAFs)

A donor-advised fund (DAF) is a charitable giving account sponsored by a public charity, such as a community foundation or financial institution. Donors who contribute assets—cash, stocks, or other property—receive an immediate tax deduction, and then recommend grants to charities over time.5 While the sponsoring organization has ultimate control, donors enjoy significant flexibility in directing funds, making DAFs a versatile tool for philanthropy.

Typical Uses and Advantages

DAFs shine in high-income years, allowing donors to make a lump-sum contribution, claim a sizable deduction, and distribute grants gradually.5 The funds within a DAF can be invested and grow tax-free, potentially increasing the impact of future giving. Donors also benefit from streamlined recordkeeping and the ability to support multiple charities from a single account.

Contrast With Other Charitable Vehicles

Compared to private foundations, DAFs require less administrative effort and lower costs, with no need to establish a separate legal entity.7 Unlike direct gifts to charities, which provide immediate support but no ongoing control, DAFs allow donors to plan their philanthropy strategically over the years.

The Core Question: Can a QCD Go To a Donor-Advised Fund?

Regulatory Guidance and Restrictions

The IRS imposes clear rules on QCDs: the distribution must go to a qualified charity, defined under Section 170(b)(1)(A), such as public charities, churches, or educational institutions.2,4 It’s important to note that donor-advised funds do not qualify. IRS guidance—specifically, the Pension Protection Act of 2006 and subsequent clarifications—explicitly excludes DAFs, private foundations, and certain other entities from receiving QCDs.8,9 As of March 27, 2025, this restriction remains in place.

Rationale Behind the Restriction

The IRS distinguishes DAFs because donors retain advisory privileges over how funds are distributed, even after the initial contribution.8 For a QCD to qualify, the donation must be an outright gift with no ongoing benefit or control for the donor.2 A DAF’s structure—where the donor suggests grants—violates this principle, aligning more with personal financial management than direct charity.9

Common Misconceptions

Many retirees assume any charitable entity can receive a QCD, given DAFs’ nonprofit affiliation. However, their advisory nature sets them apart.9 No exceptions currently allow direct QCDs to DAFs, though legislative changes could theoretically alter this in the future.

Alternatives to Making a QCD to a Donor-Advised Fund

Direct Gifts to Qualified Charities

The simplest workaround is to direct QCDs to eligible charities—think local food banks, religious organizations, or universities.4 These gifts satisfy RMD requirements and deliver immediate tax savings, aligning with IRS rules.1

Combining DAF Giving With Other Strategies

Retirees can still integrate DAFs into their plans indirectly:

  1. Complete a QCD: Send the distribution to a qualified charity.1
  2. Take Additional Distributions: Withdraw extra funds from the IRA, if needed, beyond the QCD amount (taxable as income).1
  3. Contribute to a DAF: Use after-tax dollars from the withdrawal or other sources to fund a DAF, claiming a deduction if itemizing.5

This approach sacrifices the QCD’s direct tax exclusion for the DAF contribution but preserves flexibility in grant-making.

Using Other Accounts for DAF Contributions

Instead of IRA funds, retirees can fund DAFs with appreciated securities, cash, or other assets. Donating stock, for instance, avoids capital gains tax and may yield a deduction,5 offering a tax-efficient alternative to cash contributions. This supports long-term philanthropy without relying on QCDs.

Strategic Considerations for Retirees and Advisors

When a QCD Makes Sense

QCDs excel when RMDs push retirees into higher tax brackets or when they don’t itemize deductions.1,6 If charitable goals align with eligible organizations, a QCD optimizes tax savings while meeting IRS requirements.

When a DAF Makes Sense

DAFs suit retirees wanting centralized giving, anonymity, or a multi-year plan.5 They’re ideal for legacy planning or managing large donations in peak earning years, offering growth potential and administrative ease.

Blending Approaches

Consider a retiree with a $30,000 RMD and $50,000 in annual giving goals. They could direct $20,000 as a QCD to a local charity, reducing taxable income,1 then contribute $30,000 in appreciated stock to a DAF for future grants.5 This balances immediate tax relief with long-term flexibility.

Consulting with a Financial Advisor

Navigating QCDs, DAFs, and tax rules requires tailored advice. A professional can assess RMD obligations, legacy plans, and charitable intent to craft an optimal strategy.

We Can Help You Further

Under current IRS rules, QCDs cannot go directly to donor-advised funds due to the donor’s retained advisory role.8,9 However, retirees can pair QCDs to qualified charities with separate DAF contributions, leveraging both tools effectively.

Charitable giving in retirement can be a powerful way to leave a legacy and manage taxes—but precision matters. By using QCDs and DAFs correctly, you can amplify your impact. For personalized guidance, schedule a free consultation with our team to align these strategies with your unique goals.

Sources:

  1. IRS Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs). https://www.irs.gov/publications/p590b. Accessed March 2025.
  2. Internal Revenue Code Section 408(d)(8). https://www.law.cornell.edu/uscode/text/26/408. Accessed March 2025
  3. Give More Tax Free Eligible IRA Owners Can Donate Up to 105,000 to Charity in 2024. https://www.irs.gov/newsroom/give-more-tax-free-eligible-ira-owners-can-donate-up-to-105000-to-charity-in-2024?utm_source=chatgpt.com. Accessed March 2025.
  4. Internal Revenue Code Section 170(b)(1)(A). https://www.law.cornell.edu/uscode/text/26/170. Accessed March 2025
  5. IRS Publication 526: Charitable Contributions. https://www.irs.gov/publications/p526. Accessed March 2025.
  6. Tax Cuts and Jobs Act of 2017. https://www.congress.gov/bill/115th-congress/house-bill/1.  Accessed March 2025
  7. IRS Publication 557: Tax-Exempt Status for Your Organization. https://www.irs.gov/pub/irs-pdf/p557.pdf. Accessed March 2025.
  8. Pension Protection Act of 2006 (Public Law 109-280). https://www.congress.gov/bill/109th-congress/house-bill/4. Accessed March 2025.
  9. IRS Notice 2007-7. https://www.irs.gov/pub/irs-drop/n-07-07.pdf. Accessed March 2025.

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