In December 2015, Congress passed a law allowing you to gift up to $100,000 to charity directly from your individual retirement account (IRA). You can do so after you are over 70 1/2 years old without counting the distribution as taxable income. This type of charitable gift is called a Qualified Charitable Distribution (QCD).

As the IRS says on their FAQs, “Generally, a qualified charitable distribution is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity.”

In this way, you can do a QCD from any type of IRA account — traditional, rollover, inherited — excepting only “ongoing” SEP or SIMPLE IRAs.

SEP and SIMPLE IRAs are both types of employer sponsored retirement accounts.

Although there is not a specific IRS statement that defines “ongoing” for the purposes of QCDs, in Publication 590-B, the IRS states with regards to the IRA qualified HSA funding distribution, “For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made.” This definition is the one used for QCDs: if your SEP-IRA receives an employer contribution, then it is still ongoing.

If an employer contributes to any employees SEP-IRA, they are required to contribute to all active employee’s SEP-IRAs. As long as you are still employed with the firm, your SEP-IRA should receive contributions and will be ongoing.

With this in mind, I recently received the following reader question about QCDs:

I am over age 70 1/2. I want to do a Qualified Charitable Distribution, but my only IRA is an ongoing SEP-IRA. Can I do one?

Although the short answer is no, there is a method to do a QCD from SEP IRA assets after transferring them to a different type of account.

By IRS law, SEP IRAs are always 100% vested. Since 100% of the assets in a SEP-IRA are owned by the employee, the employee is allowed to do an IRA Rollover even if their SEP-IRA is still ongoing. The steps to do the IRA Rollover are easy.

First, open a traditional IRA or IRA Rollover account. Second, transfer all of the SEP-IRA assets into the traditional IRA using a trustee-to-trustee transfer. Once the assets are in the traditional IRA registration, you will be free to complete qualified charitable distributions per the usual rules.

That being said, using this strategy once you are over age 70 1/2 requires planning ahead one year. Before you transfer funds from one retirement account to another, the IRS requires you to distribute your Required Minimum Distribution (RMD) for the year from that account.

The first year you use this QCD technique, you must satisfy the RMD from your ongoing SEP-IRA, which means you cannot do a QCD. Then, near the end of the year after any employer contributions are deposited in your SEP-IRA, you can perform the IRA Rollover from SEP-IRA to traditional IRA. This will leave your SEP-IRA empty on December 31st which will mean you will have no SEP-IRA RMD for the following year.

In each subsequent year, you can gift Qualified Charitable Distributions from your traditional IRA’s RMD. Then, receive your employer’s SEP contribution, perform another IRA Rollover from SEP to traditional, and leave your SEP-IRA empty on December 31st.

In this way, you’ll never have another required minimum distribution for your SEP-IRA and will be able to receive the full benefit of qualified charitable distributions using your traditional IRA.

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