Charitable Donations from IRAs

Submitted by Bob Foland on Fri, 2019-11-22 17:48

My client wishes that her 401(k) plan had missed her RMD before transferring her balance into an IRA with my firm so that she could make some direct charitable donations after we had completed the transfer. They didn’t. If she chose to make direct donations in excess of her RMD, would they still be tax free, or would they be treated as taxable distributions first?

As a side question, it seems to me that, with some frequency, plan administrators don’t issue RMD checks with such transfers. Isn’t that a requirement? If I’m correct about that, how do they not get their hands slapped by the IRS?



Submitted by Alan - IRA critic on Fri, 2019-11-22 18:42

  • Even if the 401k plan had neglected the RMD distribution, the direct rollover to an IRA would have have included the RMD and created an excess IRA contribution in the amount of the 401k RMD. Therefore, this year’s RMD would have been distributed either way. Client can still do a QCD from the IRA and it will be non taxable and more tax efficient than making a donation from taxable money, however it will NOT offset the taxable income from the 401k RMD. If client already had an IRA balance before this and the 2019 RMD has not yet been completed, then an IRA QCD could still offset taxable income from the IRA RMD for 2019. But if there was no IRA balance on 12/31/2018 then there is no IRA RMD for this year, but there will be for 2020 due to the IRA balance created by the 401k rollover. 
  • Side question – sometimes an employee over 70.5 and still working will do an IRA rollover, but no RMD is required because they are still working. Then they retire before year end resulting in the year becoming an RMD distribution year and the RMD portion of the direct rollover must then be treated as an RMD and excess IRA contribution. In other cases, the plan might just mess up and forget the RMD. The tax code states that all distributions made in an RMD distribution year are first allocated to the RMD for that year, so the IRS is not concerned with those situations. They are more concerned when the employee is subject to RMDs and the plan fails to distribute them. EPCRS provides corrective measures for plans that make this error, and these measures include making up the missed RMDs immediately.

Add new comment

Log in or register to post comments