ComplianceTax & AccountingOctober 20, 2019

Individual retirement accounts: Qualified charitable distributions revisited



Overview

For several years the rules have allowed for tax-fee individual retirement account (IRA) distributions, if the distributions are paid directly to a qualified charity. This tax law provision is referred to as a qualified charitable distribution (QCD). A QCD is applied to an individual’s annual required minimum distribution (RMD). The Protecting Americans from Tax Hikes (PATH) Act of 2015 made the QCD provision permanent allowing an eligible individual to engage in proactive strategies to reduce the tax bite of having to include an IRA RMD as additional taxable income.

Requirements

  • An IRA owner or beneficiary must be at least age 70½ on the date of the QCD. Simply attaining age 70½ later in the year does not meet this rule.
  • An individual’s maximum annual QCD amount cannot exceed $100,000 in aggregate from all IRAs. A married couple is limited to $200,000 with each individual having a $100,000 limit from his/her own IRA(s).
  • The QCD must go to a charitable organization as defined in IRC section 170(b)(1)(A) and cannot go to certain private foundations [IRC section 509(a)(3)], or donor advised funds [(IRC section 4966(d)(2)]. An individual should discuss this aspect of the QCD provision with his/her tax or legal advisor prior to the IRA distribution.
  • If done by check, versus a direct deposit to a charitable organization’s account, the check must be made payable to the charitable organization. If, when taken from the IRA, the funds are made payable to the IRA owner or beneficiary and then paid to the charitable organization, it is not a QCD. Additionally, an individual is permitted to deliver a check to the charitable organization as long as the check is made payable to the organization.
  • IRA custodians/trustees report these distributions using either a code 7 (normal distribution) or a code 4 (death distribution) when taken from a traditional IRA.
  • An individual taking advantage of the QCD provision should, with the assistance of his/her tax preparer, follow the instructions for lines 4a and 4b of IRS Form 1040 (2018 version), U.S. Individual Income Tax Return, to claim exemption from tax. An IRA owner does not need to itemize to receive this tax benefit. However, if a distribution is taken by an individual who later wishes he/she had taken a QCD instead, if eligible that individual can make a charitable donation and take an itemized deduction. From a tax benefit standpoint, this approach may be less favorable than a QCD.
  • QCDs cannot be taken from an ongoing simplified employee pension (SEP) or Savings Incentive Match Plan for Employees of Small Employer (SIMPLE) IRAs. For this purpose, “ongoing” means if an individual’s SEP or SIMPLE IRA accepts an employer contribution made for the plan year ending with or within the same year the individual takes a QCD.
  • A QCD cannot be taken from an employer qualified retirement plan.

Example

Bailey has turned age 71 in 2019 and has an IRA balance of $213,000. Her RMD for 2019 is $8,038. If Bailey takes a $7,000 distribution from her IRA and asks for a check to be made payable to a qualified charity, she will satisfy $7,000 of her RMD without being subject to any federal income tax liability. She would however be required to take another $1,038 to satisfy her 2019 RMD and pay income tax on that amount, unless she also chooses to treat that amount as a QCD.

Example

Jayden, who will attain age 70½ on December 21, 2019, has an RMD of $2,461 for 2019. Jayden takes a distribution of $2,500 in July 2019 and has the check payable directly to a qualified charitable organization. Because Jayden did not wait until he actually attained age 70½, all he can do is apply this distribution toward meeting his RMD requirement and potentially claim this amount as an itemized deduction.

Keep in mind IRA rules consider the first distribution amount taken during a year is attributable to an individual’s RMD. Furthermore, because the IRA rules do not allow an RMD to be rolled over, once a distribution occurs it is an irrevocable distribution subject to taxation.

Conclusion

The QCD provision should remain in place for the foreseeable future. It allows eligible IRA owners and beneficiaries to give to a charitable organization and reduce their federal income tax liability at the same time. As always, it is important for individuals to discuss with their tax or legal advisor whether or not taking a QCD is in their best interest.

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Randy Heidmann
Senior Specialized Consultant, Tax Advantaged Accounts, Compliance Center of Excellence
With more than 40 years of industry experience, Randy Heidmann has helped hundreds of financial organizations create, implement and maintain their tax-advantaged accounts programs.