Example:QCD gifts can be used to satisfy the IRA owner’s RMDs, up to the $100,000 limit on QCDs. If a donor’s RMD is less than the $100,000 limit, the QCD is not restricted to that lower RMD amount. The donor can give up to the $100,000 limit each year through QCDs.
Nancy, now retired, celebrated her 71st birthday in December. Nancy customarily gives $5,000 in cash to her favorite charity to celebrate her birthday each year. Nancy is fortunate to have a significant stream of income from her investments and does not anticipate needing RMDs from her IRA to supplement her income. She is also lucky to have two successful and independent adult children who share her passion for investing. She does not anticipate them needing cash from her estate as they are both already high income earners.
Nancy began to think about how her future RMDs would impact her financial plan. Nancy understood from her financial advisor that due to the SECURE Act, she would not be required to take required minimum distributions (RMDs) until after she turns age 72. Her financial advisor noted that structuring her annual gift as a QCD gift from her IRA could nevertheless assist with her tax planning objectives.
Nancy directed her IRA custodian to transfer $5,000 to her favorite charity as a QCD gift. This QCD gift would not be deductible for income tax purposes. However, the gift allows Nancy to give these funds tax-free and reduce her future RMDs by drawing down her account balance. Nancy is pleased to make her birthday gift out of her IRA.
Anton has turned age 72 and must start taking RMDs from his traditional IRA. His financial advisor estimated that his first RMD payment would be about $50,000. Anton supports local charities in his area. He reached out to his financial advisor to determine if there was any way to structure his RMD payment to reduce the likelihood he would be pushed into a higher tax bracket. He decides to use his IRA RMD amount as the value for his QCD to offset the tax implications he otherwise would have realized if he accepted the RMD as income. The QCD amount is not considered taxable income to Anton and satisfies his traditional IRA mandatory withdrawal for the year.Under the SECURE Act, the QCD annual maximum amount will be reduced by the donor’s pre-tax IRA contributions after 70½. This may impact a very small subset of charitably-inclined donors, but is very important for professional advisors to understand.
Example:The 2022 IRA RMD tables have reduced the mandatory withdrawal percentages for account owners. The IRA charitable rollover or QCD remains a valuable planning option for donors who wish to mitigate the income tax consequences of current and future RMDs through their philanthropy. This result may be particularly compelling for those who took advantage of the CARES Act RMD waiver and now have larger account balances and larger future RMDs.
Octavia loves her career and has continued to add to her traditional IRA, even though she has reached age 73. She understands that she can make tax deductible contributions to her IRA as long as she has taxable compensation. Octavia currently receives required minimum distributions (RMD) from her IRA. Given her current income, investment income and social security distributions, Octavia does not feel as though she needs the additional income that the IRA distributions will provide. She noticed that with her RMD last year, there was an increase in her income taxes.
Her advisor explains that if Octavia wants to make an IRA charitable rollover gift to charity, the tax implications for the QCD will be impacted by the value of her pre-tax contributions to the IRA. The advisor gave a detailed response and explanation. In 2021, Octavia made pre-tax contributions to her IRA in an amount of $7,000 and made a QCD to charity of $10,000. Because Octavia made a tax deductible contribution to her IRA, the QCD will be partially-taxable due to the pre-tax IRA contributions. Her QCD will be taxable income in the amount of $7,000 due to the cumulative value of the pre-tax IRA contributions made after she turned 70½. The remaining $3,000 of the QCD will be excluded from her taxable income. Octavia would be able to claim an itemized deduction for the $7,000 of recaptured IRA contributions that do not qualify as a QCD. The remaining $3,000 will be treated as a QCD and excluded from her taxable income.
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