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ComplianceTax & AccountingOctober 20, 2021

Individual retirement accounts: Qualified charitable distributions revisited

Overview

For several years the rules have allowed for tax-fee individual retirement account (IRA) distributions considering 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, each 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 considering 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, 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 73 in 2021 and has an IRA reflecting a balance of $213,000 as of December 31, 2020. Her RMD for 2021 is $8,623.48. 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 $1,623.48 to satisfy her 2021 RMD and pay income tax on that amount, unless she also chooses to treat that amount as a QCD.

Example

Jayden, age 72, has an RMD of $2,461 for 2021 which was taken from his IRA and deposited to his checking account. Jayden subsequently wrote a personal check made payable to a charitable organization. Because Jayden’s 2021 RMD was not remitted or paid directly to the charitable organization from his IRA, Jayden can only apply the distribution toward meeting his RMD and potentially claim this amount as an itemized deduction on his tax return.

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 and whether applying the QCD provision to an IRA distribution is in their best interest.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider the Wolters Kluwer IRA Library or on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.
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.
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