New legislation would allow individuals to use a qualified charitable distribution from an IRA to contribute to a donor-advised fund, creating a more tax-efficient giving method for older clients.
Investors 70 1/2 or older can use a QCD to transfer money directly from their IRA to a charity without paying income tax. A QCD counts toward the investor's required minimum distribution.
The bill, the IRA Charitable Rollover Facilitation and Enhancement Act, introduced by Reps. Adrian Smith, R-Neb., and Jimmy Panetta, D-Calif., would amend a restriction in the tax code preventing donors from making QCDs to donor-advised funds.
DAFs allow individuals and families to designate funds for charitable giving up front and allocate the funds to their preferred charities over a number of years.
Not allowing a qualified charitable distribution into DAFs "has always been a significant shortcoming of the [QCD] provision, and permitting this would be a welcome change," Jeff Bush of The Washington Update told ThinkAdvisor Monday in an email. "Every retiree’s situation is unique, and making this change would introduce more flexibility for donors and enhance timing control. There are scenarios when a donor prefers to distribute funds to the charity over time; however, donating all the money within a single tax year would be more advantageous."
The bill would enable donors “to give smarter and support a broader range of causes," Panetta said in a statement. "This commonsense change empowers generosity, strengthens local communities, and reflects how people actually want to give."
The bill "would create numerous planning opportunities for advisors, donors and charities, and I believe it has a good chance of making it into a final tax bill," Bush said.
'Layers of Complexity'
Allowing qualified transfers to donor-advised funds is a good idea, but it would add "more layers of complexity, compliance and tracking over future years," said tax and IRA expert Ed Slott of Ed Slott & Co.
"The original intent of the QCD was to leave DAFs (and other more complex entities) out to keep the provision simple by making it only available to charities through direct transfers from the IRA to the charity, without any go-betweens," he said.
He added that the Secure 2.0 Act allows limited, one-time QCDs to fund entities like charitable gift annuities and charitable remainder trusts.
"But those have not really caught on because the gift amount [capped at $54,000 in 2025] and the restrictions were viewed as too low to justify the cost of setting these vehicles up," he said.
A Valuable Deduction
The QCD limit, indexed to inflation, is $108,000 in 2025. Eligible clients who have not yet reached RMD age can use these distributions to make tax-efficient charitable gifts while reducing their future RMDs.
A QCD "is a more tax-efficient way to do charitable giving for those filers over 70 1/2 who are charitably inclined and don’t need their RMD for their lifestyle," Bush explained. "A charitable deduction is a great deduction, but it’s a below-the-line deduction. A QCD is the same money going to the same charity, but it’s an above-the-line deduction. Above-the-line deductions are simply more valuable than below-the-line deductions."
For instance, "a client in the above situation experiences a liquidity event or another unexpected influx of income within a given year, allowing the donor to transfer up to $108,000 to a DAF as an above-the-line deduction and distributing the proceeds over several years may more closely align with how the donor wishes to fund a particular interest," Bush continued.
A QCD "is a vastly underutilized tool in advisors' toolkits," Bush added. "When I present to advisors, I ask for a show of hands to see how many consistently use QCD with their clients. Typically, it’s only about 25%. Just like no tool kit is complete without a screwdriver, advisors should be prepared to utilize it when the situation warrants."
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