How do custodians determine eligibility for QCDs and what documentation do they keep to support Code Y?
Executive summary
Custodians determine whether a distribution qualifies as a Qualified Charitable Distribution (QCD) principally by verifying that the transfer was a direct distribution from an eligible IRA to a qualifying charity and by relying on IRA owner representations where the facts are ambiguous; the IRS began creating a discrete reporting path for these transactions by introducing Code Y for Box 7 of Form 1099‑R for distributions made on or after January 1, 2025 (use of Code Y was optional for 2025 reporting) [1] [2]. In practice this has forced custodians to update intake forms, workflow rules and reporting systems, while also exposing limits to what custodians can definitively determine about partial QCDs and certain Roth-related questions that the IRS has not fully clarified [3] [4].
1. How custodians screen the mechanics of a QCD: direct transfer and eligible account
The first-line determination is mechanical: custodians confirm the funds came from an eligible IRA (traditional, rollover, or in many cases inherited IRAs) and that payment was made directly to a qualifying 501(c) charity rather than to the account owner or to disallowed vehicles like donor‑advised funds or private foundations [5] [6]. Custodians also check dollar limits and age eligibility rules — the QCD age requirement remains 70½ and annual indexed caps (for example, $108,000 in 2025, rising to $111,000 for 2026) factor into whether the transfer fits QCD rules — and they ensure the transfer method and timing comport with the statutory QCD mechanics [7] [6].
2. Where custodians defer to taxpayer representations: partial distributions and complexity
When a distribution is only partly a QCD or involves complicating facts, custodians cannot always compute the legally eligible QCD amount on their own and may rely on the IRA owner’s “reasonable representations” to treat up to the statutory limit as a QCD, leaving the ultimate tax determination to the taxpayer and their preparer [4]. Morningstar and other industry commentary emphasize this boundary: custodian systems can mark an event as a QCD when the customer represents it as such, but if only part of a larger withdrawal is claimed as a QCD, tax preparers and taxpayers must still carefully determine eligible amounts for the return [4].
3. The documentation custodians collect and retain to substantiate Code Y
Custodians have adapted intake and processing paperwork to create audit trails: charities’ payee information, payment instructions showing a payee other than the IRA owner, transaction confirmations, and internal withdrawal request forms that flag a distribution as a QCD are commonly used (Ascensus offers a Charitable Distribution Request form and custodians are updating withdrawal forms to capture QCD intent) [3]. Industry guidance instructs custodians to record the date, amount, recipient charity EIN or name, and the method of transfer (direct trustee-to-charity transfer), and custodians update their systems to preserve these fields for downstream 1099‑R reporting and potential IRS inquiries [1] [3].
4. How Code Y is recorded on Form 1099‑R and operational impacts
The IRS’s new Code Y was created so custodians can identify known QCDs on Box 7 of Form 1099‑R for distributions made on or after 1/1/2025, and while Code Y reporting was optional for 2025 it becomes a structural requirement going forward — requiring custodians to change data flows so Box 2a taxable amounts remain accurate while QCD dollars are flagged separately with Code Y [1] [2]. Custodians have pushed back and warned of implementation hurdles; industry commentators note the change prompted software and procedure updates across large financial institutions and created lobbying friction over the timeline and burden of compliance [8] [1].
5. Remaining gaps, practical risks and what custodians cannot unilaterally resolve
Even with enhanced forms and Code Y tagging, custodians face clear limits: they cannot always determine the precise tax outcome for complex scenarios (partial QCDs, post‑70½ deductible contributions that affect QCD qualification, or unanswered Roth reporting conventions), so their documentation supports reporting but does not substitute for taxpayer or preparer determinations; the available reporting does not yet resolve every ambiguity [4] [7] [3]. Reporting sources do not provide uniform specifics on retention periods or the exact internal audit checklists every custodian uses, so firm‑level practices vary and taxpayers should expect custodians to maintain transaction records, QCD request forms and confirmations to substantiate Code Y entries but also to rely on taxpayer representations where law or facts require it [3] [1] [4].