Why QCDs Don’t Work for Private Foundations: 5 Smarter Moves for 2025
Let's just get this out of the way. You’re here because you’re frustrated. And you have every right to be.
You’ve done everything right. You’ve built a successful business or career. You’ve saved diligently, growing a massive IRA. And to create a lasting legacy, you’ve established a private foundation to make a real, strategic impact on the causes you care about.
Then you hear about this magical tax unicorn: the Qualified Charitable Distribution (QCD). A way to give money directly from your IRA to charity, tax-free. It even counts toward your Required Minimum Distribution (RMD). It’s perfect!
You call your IRA administrator, tell them to send $100,000 to "The [Your Last Name] Family Foundation"... and you get a hard "No."
What gives? It’s your money. It’s your foundation. It’s for charity. Why doesn’t it work?
I’ve had this exact conversation over coffee with so many successful founders and families, and the frustration is palpable. They feel like the tax code is punishing them for being organized. But here’s the good news I share with them, and now with you: the problem isn't the rule. The problem is the strategy.
You’re not blocked; you’re just taking the wrong path up the mountain. Today, we're going to ditch the blocked path, look at a map, and find the smarter, faster, and far more tax-efficient route to the summit.
⚠️ A Quick Disclaimer Okay, let's get the important stuff out of the way. I'm passionate about smart financial strategy, but this is a high-stakes area of the U.S. tax code. This post is for informational and educational purposes only. It is not legal, financial, or tax advice. Every single person's situation is unique. Before you move a single dollar, please, please talk to your CPA and a qualified wealth advisor. This is "measure twice, cut once" territory.
First, What Exactly is a QCD (And Why Is It So Great)?
Before we break the rule, let's understand the tool. A Qualified Charitable Distribution (QCD) is, for many retirees, the single best way to give to charity.
Here’s the deal:
- Who: You must be age 70.5 or older. (Note: The RMD age is now 73, but the QCD age remains 70.5. Classic government simplicity, right?)
- What: You can instruct your IRA administrator to transfer money directly from your IRA to a qualified 501(c)(3) charity.
- How Much: You can give up to $105,000 per year (this amount was indexed for inflation starting in 2024). If you're married, your spouse can also give $105,000 from their own IRA.
The Magic of the QCD: AGI Reduction
Here’s why it’s so powerful. A QCD is an exclusion from income, not a deduction.
This is a critical difference. When you take a normal IRA distribution, that money is added to your Adjusted Gross Income (AGI). Even if you later donate it and take a charitable deduction, your AGI is still high. A high AGI can be painful—it can trigger phase-outs for other deductions, increase your Medicare premiums, and subject more of your Social Security benefits to taxation.
A QCD bypasses all of that. The money goes from the IRA to the charity. It never touches your bank account. It never shows up as income. It's invisible to your AGI.
And the kicker: If you are 73 or older and subject to RMDs, the QCD amount counts toward satisfying your RMD for the year.
It’s a tax-planning masterpiece. It lets you satisfy your RMD, lower your taxable income, and support a cause you love, all in one move. So... why can't your private foundation get in on this?
The Hard Stop: Why the IRS Blocks QCDs to Private Foundations
The rule is painfully clear. The IRS, in Publication 590-B (Distributions from Individual Retirement Arrangements), states that a QCD cannot be made to certain types of organizations.
The forbidden list includes:
- A Donor-Advised Fund (DAF)
- A Private Non-Operating Foundation
- A Supporting Organization (Type III)
When you, your CPA, or your wealth advisor refer to your "family foundation" or "private foundation," you are almost certainly talking about a private non-operating foundation—a structure designed to receive your contributions and then make grants to public charities over time.
And that is, unfortunately, item number two on the IRS's "no-fly list" for QCDs. There's no ambiguity. It's just a hard "no."
The "Why" Behind the Rule: Congress's Intent
This isn't just the IRS being difficult. This rule comes from Congress, and there's a (somewhat) logical reason for it.
Think about the "deal" Congress is offering with a QCD. They're letting you, the taxpayer, avoid income tax on money that has never been taxed (your pre-tax IRA). This is a huge tax break. In exchange, they want that money to go to work immediately in the charitable sector.
Public charities (like a food bank, a university, a museum, or a church) are required to spend that money on their charitable mission. They are "pass-through" entities for public good.
Private non-operating foundations and DAFs are different. They are, essentially, charitable holding tanks. You can donate to your private foundation, and the foundation itself is only required to pay out about 5% of its assets each year. The money can (and is designed to) sit there and grow, compounding your family's philanthropic impact for generations.
Congress didn't want to give you this massive, immediate tax break just to have the money sit in a family-controlled endowment for decades. They want the money put to active, public use now.
So, they drew a line in the sand: the QCD tax break is only for contributions to active public charities. Your private foundation, amazing as it is, is on the other side of that line.
Why QCDs Don’t Work for Private Foundations (And What to Do Instead)
Okay, so the direct path is blocked. This is where 90% of people give up, throw their hands in the air, and just do something inefficient.
But you're not going to do that. Because now we get to the "what to do instead" part. We're going to look at the three common strategies and identify the clear winner.
Alternative 1: The "Tax-In, Deduction-Out" Method (And Its Flaws)
This is the most "obvious" workaround, and it's usually the least efficient.
The Strategy: You take your $100,000 RMD as a normal distribution from your IRA. Your AGI for the year just went up by $100,000. You write a check for $100,000 from your bank account to your private foundation. At tax time, you take a $100,000 charitable deduction.
Sounds like it cancels out, right? Not even close.
The Flaws of This Method:
- AGI Is Inflated: Your AGI is $100,000 higher. This "AGI hurdle" can cause a cascade of negative effects, like triggering the 3.8% Net Investment Income Tax (NIIT), increasing your Medicare Part B and D premiums, and making more of your Social Security taxable.
- Deduction Limits: Charitable deductions for cash given to a private non-operating foundation are generally limited to 30% of your AGI. If that $100,000 gift is more than 30% of your AGI, you can't even deduct the full amount in the same year (you'd have to carry it forward).
The verdict: This is clunky, inefficient, and can create a nasty, unexpected tax bill. We can do better. A lot better.
Alternative 2: The "Two-Pocket" Strategy (The Big Winner)
This is it. This is the strategy the pros use. It's the "A-ha!" moment. It's not a workaround; it's a superior philanthropic plan.
This strategy understands that you don't have one pool of money; you have (at least) two: your IRA (tax-deferred) and your taxable brokerage account (post-tax).
The Strategy: Pocket 1 (Your IRA): You still use your QCD! You take that $100,000 from your IRA and send it directly to a public charity you also care about. This could be your university, your church, the local hospital, or a national organization like the Red Cross. Result: You satisfy your $100,000 RMD. Your AGI is not affected. You pay $0 in tax on that distribution. It's perfect. Pocket 2 (Your Taxable Brokerage): Now, to fund your private foundation, you turn to your other pocket. You find $100,000 worth of highly appreciated stock (or mutual funds) that you've held for more than one year. You donate that stock directly to your private foundation. Result: This is a double tax win. First, you get to take a charitable deduction for the full fair market value (FMV) of the stock. Second, you (and your foundation) never pay a cent of capital gains tax on that appreciation.
Let's say you bought $100,000 of Apple stock 10 years ago, and it's now worth $500,000. If you sold it, you'd have a $400,000 capital gain and a massive tax bill. If you give it to your foundation, that $400,000 gain... vanishes. Poof. It's never taxed. And you still get a deduction for the full $500,000 (subject to AGI limits for stock, which is 20% for private foundations).
The verdict: This "Two-Pocket" strategy is the single most tax-efficient way for a high-net-worth individual to be philanthropic. It uses the QCD for its intended purpose (RMDs, public support) and uses appreciated assets for its intended purpose (funding a legacy foundation while avoiding capital gains). It's a true win-win.
Alternative 3: Giving After-Tax IRA Money
This is the last resort. Let's say you have no appreciated stock and you are determined to fund your private foundation from your IRA.
The Strategy: You take your $100,000 RMD from your IRA. You pay ordinary income tax on it. Let's assume a 35% federal/state blended rate. You are left with $65,000 in cash. You donate that $65,000 to your private foundation. You get a charitable deduction for $65,000 (which is limited by your AGI, as noted in Alt #1).
The verdict: This is... not great. You've "lost" $35,000 of your potential gift to taxes. It's inefficient and painful. But it's an option if all others are exhausted.
The Niche Exception: What About Private Operating Foundations?
There is one small exception to this rule. A QCD can be made to a private operating foundation.
What's the difference?
- A Private Non-Operating Foundation (what most people have) is a grant-making entity. It takes in money and gives it away to other charities.
- A Private Operating Foundation (very rare) actively runs its own charitable programs. Think of a private museum (like The Getty) or a research institute that is funded by a single family but operates its own programs.
For 99% of people, this exception doesn't apply. If your foundation's primary activity is writing checks to other charities, it's non-operating, and the no-QCD rule stands.
Infographic: Smart Philanthropic Funding Strategies
Your Pre-Flight Checklist (Before You Move Any IRA Money)
Feeling ready to take action? Good. Here’s a simple checklist to run through with your financial advisor or CPA before you make a move.
- Confirm Your Age: Are you 70.5 or older? (This is the magic number for QCDs, even if your RMD age is 73).
- Confirm Your IRA Type: Is the money in a Traditional IRA, Inherited IRA, or inactive SEP/SIMPLE IRA? (QCDs cannot be made from active SEP/SIMPLE IRAs or 401(k)s).
- Confirm Your RMD Amount: Know exactly how much your RMD is for the year. Your QCD can satisfy this amount, but you need to know the target.
- Confirm Charity Status: Get the exact 501(c)(3) status of all charities involved. Use the IRS's Tax Exempt Organization Search. Is it a public charity? A private non-operating foundation? A private operating foundation? Don't guess.
- Model the "Two-Pocket" Strategy: Ask your CPA to run the numbers. What's your unrealized capital gain on your most appreciated stocks? How does the tax savings from donating that stock compare to the income tax of a straight IRA distribution?
- Execute as a Trustee-to-Trustee Transfer: A QCD must be a direct transfer from your IRA custodian to the charity. If they send the check to you (made out to you), it's a failed QCD and becomes taxable income. The check must be made out to the charity.
Trusted Resources for Philanthropic Planning
Don't just take my word for it. This is complex stuff, and digging into the primary sources is always a good idea. Here are a few places to start your research (before you call your CPA!).
Frequently Asked Questions (FAQ)
1. What is a Qualified Charitable Distribution (QCD) again?
A QCD is a direct transfer of funds from your IRA (if you're 70.5 or older) to a qualified public charity. It is excluded from your income, isn't taxed, and can count towards your Required Minimum Distribution (RMD). The annual limit is $105,000 for 2024 (and will be indexed for 2025).
2. Can a QCD go to a Donor-Advised Fund (DAF)?
No. This is a critical point. DAFs are on the same "disallowed" list as private non-operating foundations. A QCD cannot be used to fund a DAF. You must use the same "Two-Pocket" strategy: use your QCD for public charities and fund your DAF with cash or, even better, appreciated stock.
3. What is the maximum QCD for 2025?
The limit for 2024 was $105,000. This amount is now indexed for inflation. The IRS typically announces the inflation-adjusted limit for the next year in late fall. You should check the official IRS publications or consult your CPA for the exact 2025 limit.
4. Why is excluding income (with a QCD) better than taking a deduction?
An exclusion lowers your Adjusted Gross Income (AGI). A deduction comes *after* your AGI is calculated. Lowering your AGI is more powerful because it can prevent you from hitting thresholds that trigger other taxes (like on Social Security or investments) and can make you eligible for other credits or deductions.
5. What's the main difference between a private foundation and a public charity?
A public charity (like the Red Cross or a local food bank) gets its funding from the general public and spends its money on its mission. A private non-operating foundation (like a family foundation) is typically funded by one person or family and accomplishes its mission by making grants to public charities.
6. What happens if I accidentally send a QCD to my private foundation?
This creates a mess. The transaction would be a "failed QCD." It would be treated as a normal, taxable IRA distribution (increasing your income) and then a charitable contribution (which you could deduct, subject to the 30% AGI limit). You would lose the entire tax benefit of the QCD. This is an expensive mistake to avoid.
7. Can my spouse also make a QCD?
Yes. The $105,000 (as of 2024) limit is *per person*. If you and your spouse both have your own IRAs and are both 70.5 or older, you can *each* make a QCD of up to $105,000 for a total of $210,000 in tax-free giving.
8. Is a Roth IRA eligible for a QCD?
Technically, yes, but it almost never makes sense. A distribution from a Roth IRA is *already* tax-free (assuming you've met the 5-year rule). Using a QCD from a Roth provides no additional tax benefit and "wastes" the tax-free growth potential of your Roth account. QCDs are almost exclusively used from Traditional IRAs, which are funded with pre-tax dollars.
Conclusion: Stop Fighting the Rule, Start Winning the Game
So, back to that coffee we were having. See? It's not a "no." It's just a "not that way."
The tax code isn't blocking your philanthropy; it's guiding it. It's giving you a huge, flashing neon sign that says: "Use your IRA for this kind of giving, and use your appreciated stock for that kind of giving."
Your private foundation is a powerful tool for building a multi-generational legacy. Your IRA is a powerful tool for tax-efficient RMDs. The mistake is trying to use one tool for the other's job. It's like trying to use a hammer to turn a screw. You might get it in, but it's going to be ugly.
The "Two-Pocket" strategy is the power drill. It uses both tools for their exact, intended purpose to build something strong, smart, and efficient.
So, here's your call to action. Stop staring at your IRA statement in frustration. Pick up the phone. Call your wealth advisor and your CPA today.
Ask them one simple question: "Can you please model the 'Two-Pocket' strategy for me? Let's look at my most appreciated assets and my RMD, and see how we can maximize my impact—and my tax efficiency—this year."
That's how you stop fighting the rules and start winning the game.
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