This checklist may be a helpful guide to moving their money from a 401(k), 403(b), or other non-IRA account to prepare for future QCD contributions.

This visual is designed to show donors why waiting until the year they have an RMD to move their 401(k) results in an unnecessary tax bill.

A qualified charitable distribution (QCD) counts toward the donor’s required minimum distribution (RMD), and that’s a great way to avoid some of the income tax on the RMD. However, some donors miss the fact that RMDs apply to all qualified retirement plans. In addition, donors may not fully understand that withdrawals from any qualified plan are taxable income unless the withdrawal is a QCD or a tax-free rollover to a different qualified plan.

So, while it’s accurate to say “your QCD will reduce the tax on your RMD,” that’s true only for the IRA account from which the QCD is made. And that’s the trap that snared your hapless donor: there is an RMD on their 401(k) which they will have to take this year. But they cannot make a QCD from a 401(k) to offset that RMD. Even worse, their retirement plan custodian cannot make a tax-free rollover to an IRA until after this year’s RMD has been withdrawn from the 401(k). Alas, it’s too late for this year but, fortunately, it’s easy to avoid this trap next year … if they act now.

The Qualified Charitable Distribution (“QCD”) from traditional IRAs is not new; it has been around since 2007. The Tax Act of 2006 ushered in this unique provision that allows distributions from traditional IRAs made directly to charities to escape the normal income tax on money taken out of a retirement plan. The donor is allowed to exclude the amount of the QCD from taxable income, but the offset is that there is no charitable income tax deduction for the gift being made to charity.

There has been confusion about the QCD ever since 2007, because it deals with aspects of IRAs that many are unfamiliar with. The biggest area of confusion has been distinguishing the RMD for a traditional IRA from a QCD. They are not the same thing. Not at all. And it is dangerous to confuse the two.

Here we are some 20 months after the passage of the Legacy IRA Act, and questions remain. That law updated Section 408(d)(8) of the Internal Revenue Code to allow Qualified Charitable Distributions (QCD) from IRAs to fund charitable gift annuities and charitable remainder trusts. After all this time, there remains some ambiguity