qualifed charitable distribution in year turning 70 1/2
Client of mine is turning 70 1/2 in oct 2011. Client wants to take advantage of making direct contribution from IRA to charity (qualified charitable distribution).
However most of clients funds are in 403B account with only small amount in IRA.
What I would like to do is rollover the 403B into her existing IRA prior to turning 70 1/2 so custodian won’t force the RMD to come out before rolling the distribution.
Then once funds are in the IRA account I can have client make the qualified charitable distribution.
Further there is enough in the IRA now to make the full distribution to charity prior to rolling the money. Client would prefer to do that (charity could use money now rather than later in the year).
My Questions are:
A) Does what we want to do work?
B) Can we satisfy the RMD by making direct distribution to charity prior to client turning age 70 1/2 if client is turning 70 1/2 this year?
C) Can the RMD that is based on the 403B balance at Dec 31, 2010 be satisfied with IRA money if the funds in the 403B are 100% rolled over to an IRA prior to client turning age 70 1/2 later this year?
D) Will custodian roll the money without forcing RMD if client is turning 70 1/2 later this year but not as of the date of the rollover?
I know that we can simply take the distributions from all the right places without any of the above and then make a contribution to charity which due to the fact the client has enough other income to allow for the full charitable deduction with little or no other effects on their income. However, clients are fickle as we all are aware and seem motivated by this direct to charity strategy.
Thanks as always for your help.
Howard
Permalink Submitted by Alan Spross on Mon, 2011-03-21 18:43
Howard,
It’s a difficult combination to manage. The main problem is that since 2011 is an RMD distribution year for the 403b, they will have to distribute the RMD even though the exact age 70.5 is not until Oct. That spoils the opportunity to apply the 403b funds to a QCD later.
A) Only partially
B) No. The QCD cannot be made prior to reaching the exact day client turns 70.5
C) No. Administrator must distribute the 403b RMD when funds are transferred.
D) No.
But there are still options. For example, the RBD for the 403b is not until 4/1/2012, and not until 2016 for any pre 1987 accruals. The current RMD requirements do not apply to the pre 87 balance. But if a rollover is done, the pre 87 funds are considered to be rolled over first, so she cannot roll over the post 86 amounts only and then postpone RMDs on the pre 87 amounts until 2016. So if she left the 403b alone this year, she could take the 2011 RMD in 2012. And she could use the current IRA balance for a QDC IF she does not take any IRA distribution before reaching 70.5.
Therefore, this strategy would be executed in this order:
1) Do not take ANY IRA distributions prior to the QDC which must wait until reaching 70.5
2) Do the QDC after reaching 70.5 at least in the amount of the IRA RMD for 2011, but she can do more up to 100k if she wants to. The QCD including the IRA RMD will not be taxable, but she cannot itemize the QDC as well.
3) Roll the 403b over in 2012 prior to 4/1/2012, but the 2011 and 2012 RMDs will both be distributed first. They will both be taxable in 2012 and cannot be used for a QDC.
OR
Leave the 403b in place and just take the RMD on the post 1986 accruals only, the 2011 RMD prior to 4/1/2012 and the 2012 RMD by year end 2012.
As you can probably see, if the 403b could have been rolled over before 12/31/2010, the entire RMD could be applied to a QCD. On the other hand, if she has a large pre 1987 accrual, if a rollover were done, the RMDs for the pre 87 money could no longer be deferred until 2016 and would be due in the years after the QCD expired and we have no idea how much longer the QCD will be extended. Under current law, 2011 is the final year for the QCD.
Permalink Submitted by Howard Hook on Mon, 2011-03-21 19:09
Alan,
Thanks for the reply.
I guess where it gets tripped up is in a few places:
A) Custodian won’t roll over 403B balance to IRA without taking RMD first.
B) While the RMD can be satisfied at anytime in the year client turns 70.5, the QCD must wait until the actual day client turns 70.5.
Does that sound about right?
Thanks as always Alan
Howard
Permalink Submitted by Alan Spross on Mon, 2011-03-21 19:22
Yes. The third point to make is that if any distributions are taken in an RMD year prior to the date a QCD can be made, then those prior distributions are deemed to apply to the RMD and the QCD cannot apply to that same amount of the RMD. So in a year a QCD is to be made, the RMDs must wait until after the QCD is made. And the QCD must wait until exactly 70.5.