QCD from an active SEP-IRA

Taxpayer is an employee. He and his wife own 100% of C Corp. C Corp employer contributes to SEP-IRA on behalf of 100% (constructive) owner employee. Employee is older than 72. Thus, SEP-IRA is considered an “ongoing” SEP-IRA. Employee would like to make QCD from SEP-IRA. One author says the QCD will be taxable because IRS takes the position that QCDs are NOT permitted from an “ongoing” SEP-IRA.

Another author suggests that this QCD can be made from an “ongoing” SEP-IRA because the employee did not receive a tax benefit form the SEP-IRA contribution, the C Corp did. This author acknowledges that if the taxpayer’s sole proprietorship had made the SEP-IRA contribution on his behalf, the QCD would be taxable because the taxpayer received a tax benefit from the contribution on his Form 1040. Which author is correct?

The first author suggests that the taxpayer can avoid the problem (taxable QCD) by first transferring the SEP-IRA to a traditional IRA and after that, make the QCD from the traditional IRA. That has a bad smell to it. What about the “step transaction” doctrine? Does anyone agree that you can avoid the taxation of the QCD by first transferring from the SEP-IRA to the traditional IRA and then making the QCD?



  • First author is correct. Makes sense to make a direct transfer to a TIRA and then do the QCD from the TIRA. That avoids the issues of the following QA in Notice 2007-7 altogether.
  • “Q-36. Is the exclusion for qualified charitable distributions available for distributions from any type of IRA? A-36. Generally, the exclusion for qualified charitable distributions is available for distributions from any type of IRA (including a Roth IRA described in § 408A and a deemed IRA described in § 408(q)) that is neither an ongoing SEP IRA described in § 408(k) nor an ongoing SIMPLE IRA described in § 408(p). For this purpose, a SEP IRA or a SIMPLE IRA is treated as ongoing if it is maintained under an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA owner’s taxable year in which the charitable contributions would be made. 
  • Almost any of the myriad portability options now available could be viewed as having step transaction exposures, but the IRS does not go down that path.  Doing transfers out of SEP IRAs is entirely normal and frequent as are QCDs from resulting TIRA balances. Portability is basically a divice to otherwise avoid account type restrictions that exist for various account types.  Makes no sense to make a clear violation of the “on going SEP” rule to avoid an extremely remote and theoretical  step transaction exposure. 
  • A direct transfer does not have any RMD implications and the RMD required from all non Roth IRA accounts can be aggregated under the IRA RMD aggregation rules. Therefore, while a transfer does not affect the RMD amount due for a year, it does affect whether a QCD is allowed in this situation.


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