QCD from an IRA with After-Tax Basis: What Actually Gets Donated

Full analysis

A QCD (Qualified Charitable Distribution) lets people 70½ or older transfer money directly from a traditional IRA to charity, counting toward their Required Minimum Distribution (RMD) without the amount being included in taxable income. A listener asked how this works when the IRA contains both pre-tax contributions and after-tax basis (money already taxed before it went in), which must be tracked on IRS Form 8606. Jim Saulnier explains a key rule: in a QCD, pre-tax dollars always move out first. After-tax basis cannot receive QCD treatment. So if you have $75,000 in an IRA — $65,000 pre-tax and $10,000 after-tax basis — and you make a $55,000 QCD, all $55,000 comes from the pre-tax portion. No pro-rata mixing applies.

This also means QCDs can be a tool to isolate and eventually eliminate after-tax basis. In the example above, after the $55,000 QCD you'd have $10,000 pre-tax and $10,000 basis left. A subsequent $10,000 QCD to a regular charity (not a charitable gift annuity, which has a once-in-a-lifetime $55,000 cap) would remove the remaining pre-tax dollars, leaving only the after-tax basis — which can then be converted to a Roth IRA tax-free. Saulnier also notes that after-tax dollars transferred to a charity in this context would qualify as a charitable deduction, not a QCD.