IRA CHARITABLE DISTRIBUTIONS AND ROLLOVERS: TODAY’S SLOTT REPORT MAILBAG

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

As I understand it, a contribution would be income tax free when sent directly from an IRA to a 501(c)(3) organization.  It is not clear to me if the distributions still will affect my MAGI that in turn will affect Medicare Part B IRMAA premiums.

Jennifer

Answer:

Hi Jennifer,

If your IRA distribution satisfies the conditions for a qualified charitable distribution (“QCD”), the distribution will not be taxable to you. That, by itself, won’t lower your modified adjusted gross income (“MAGI”). However, if the QCD is used to satisfy the required minimum distribution (“RMD”) from your IRA, that will reduce your MAGI. That’s because RMDs are taxable if they are not satisfied through QCDs. As you noted, reducing your MAGI could lower your Medicare Part B premiums.

QCDs are only available to IRA owners or beneficiaries who are age 70 ½ or older. The donation must be transferred directly from your IRA to the charity, and nothing of value can be received in return. The annual QCD limit is $100,000 per person.

If you have already taken an RMD for 2019 that was not a QCD (and therefore was taxable), you can still make a non-taxable QCD this year (up to the limit). However, you can’t use a QCD to offset the previously taken RMD – that must remain as taxable income. That’s why we recommend making QCDs early in the year — at the same time you take your RMD — to avoid missing the opportunity to reduce your MAGI.

Question:

Taxpayer, age 72, is going to work for a company with a 401(k) plan. He will not be an owner of the company. He has an IRA from which he has begun taking RMDs.

He is told that he can roll his IRA into the 401(k). He is also told that if he does so, he will not be required to take additional RMDs as long as he continues working. Is that right?

Answer:

Yes, and it’s because the rules for taking required minimum distributions (“RMDs”) are different between IRAs and 401(k) plans (or other company retirement plans).

For traditional IRA owners, RMDs must begin in the year the owner reaches age 70 ½. But for 401(k) participants, RMDs do not begin until the later of the year the participant reaches age 70 ½ or the year the participant retires. (In both cases, the first RMD is not due until the following April 1.) This is called the “still-working” exception.

So, once this taxpayer rolls his IRA into the 401(k) plan, he won’t have any more RMDs to take from his IRA, and he can delay receiving RMDs from his 401(k) plan until he retires.

Keep in mind that before the taxpayer does this rollover, he must first take out his IRA RMD for the year of rollover. That RMD cannot be rolled over to the 401(k) plan.

The taxpayer (or the taxpayer’s advisor) should check the 401(k) plan document to make sure the plan allows rollovers into the plan and allows participants to delay RMDs past age 70 ½ (i.e., the “still-working” exception). A 401(k) plan is not required to allow either.

Finally, the “still-working” exception doesn’t work for someone considered to own more than 5% of the company sponsoring the plan. You’ve indicated that isn’t the case here.