reduction of exclusion for QCDs

Submitted by Robert Wright on Tue, 2019-12-31 12:35

I read the following in a summary of the SECURE Act and was wondering if you can explain it in layman’s terms:

“The exclusion for QCDs will be reduced (but not below zero) by an amount equal to the excess of (1) all IRA deductions allowed to a taxpayer for all taxable years ending on or after the date the taxpayer attains age 70 1/2; over (2) all reductions to the exclusion based on post 70 1/2 IRA deductions for all taxable years preceding the current taxable year.”

Thank you in advance for your help.



Submitted by David Mertz on Tue, 2019-12-31 12:52

Similar to the way that an individual’s basis in nondeductible traditional IRA contributions cannot be used to make a QCD, it appears that an individual’s basis in *deductible* contributions for the year an individual reaches age 70½ and for the years thereafter cannot be used to make a QCD.  The IRS will need to provide guidance on how this is to be implemented.

Submitted by Robert Wright on Tue, 2019-12-31 13:10

So, apparently, this means you will have to keep track of all deductible IRA contributions you make in the tax year ending on or after the year you turn 70 1/2. 

  • Or, in other words, a QCD in any tax year will be reduced by the amount of a deductible IRA contribution you make in that year.

 

  • So, if I’m 71 as of January 2020 and still working; I make a $1,000 deductible IRA contribution in 2020 based on my 2020 earnings; and I make a $4,000 QCD to my favorite charity in 2020; my $4,000 QCD will be reduced by $1,000 (the amount of my 2020 deductible IRA contribution) and my actual tax free QCD for 2020 wil be $3,000.

 Is this correct?

Submitted by Alan - IRA critic on Tue, 2019-12-31 15:01

  • I expect many of those in their 70s first eligible to make a TIRA contribution in 2020 will be tripped up over the “anti abuse” provision regarding these contributions. Your example is correct. Only 3000 of your donation will qualify as a QCD, and the other 1000 treated as a distribution to you and not a QCD, but it could be itemized if you are able to itemize.
  • Another example. If the taxpayer makes a 7000 TIRA contribution late this week for 2020, and makes a 5000 QCD, none of the QCD qualifies. The taxpayer intended to offset 12,000 of their taxable RMD by doing this, but their tax program will likely not count the QCD, so only the 7000 contribution offsets the taxable RMD. Realizing this, taxpayer then decides to recharacterize the TIRA contribution as a Roth contribution, and that would qualify the QCD. Taxpayer gets the 5000 deduction, but for the gain in taxable income of 2000 (7k-5k) the taxpayer has a Roth instead. This is analagous to converting 7000 to a Roth will only 2000 taxable, which is a sure winner. 
  • Tax programs are going to have to catch this situation, and they probably will as long as the contribution and QCD are the same year. If the contribution is in 2020 and the QCD in 2021, the tax program will have to know about the 2020 TIRA Contribution, and if the taxpayer changes programs between those years, it will not know and will fail to offset the QCD by the amount of any prior age 70+ deductible contributions.
  • Many taxpayers will be doing back door Roth contributions at this age, but since those contributions are non deductible, they cannot be used for a QCD. Most back door users do not have a pre tax TIRA, as having one would make the conversion mostly taxable.
  • I don’t see the IRS itself doing an effective job in enforcing the anti abuse rule if tax programs do not handle this unless the contribution and QCD are in the same year. They would have to track cumulative deductible contributions from age 7.5 forward and also the cumulative QCDs which were offset to get the difference. I also expect that very few seniors will be able to track this properly, but some will not be happy when their QCDs are impaired, and they cannot even itemize. Of course, all of this only affects those with earned income or spousal earned income.

Submitted by Robert Wright on Tue, 2019-12-31 16:00

Why do I need to be 72 in 2020 to make a deductible TIRA contribution?Why can’t someone who is 71 in 2020 make a deductible TIRA contribution? 

Submitted by Alan - IRA critic on Tue, 2019-12-31 16:27

Sorry, have been dealing with the start of RMDs the last 2 days and it was stuck in my head. Starting with 2020 you can make a TIRA contribution at any age due to the Secure Act as long as you or a spouse has earned income. I am amending my post, but the balance of that post is not affected.

Submitted by David Mertz on Tue, 2019-12-31 17:37

Those making these newly permitted contributions can avoid the situation by reporting these contributions as nondeductible.  Once the individual’s IRAs have been reduced only to the basis in nondeductible contributions by making QCDs, additional amounts distributed and transferred to charity will be nontaxable but the individual will need to report the charitable contribution on Schedule A, the same as it has always been for basis in nondeductible contributions.  The difference will be that the individual might not see a tax benefit from an eventual deduction on Schedule; this serves the anti-abuse purpose.  In the meantime, any distributions they make that are not QCDs will be partially nontaxable, reducing the basis in nondeductible contributions.

Submitted by Alan - IRA critic on Tue, 2019-12-31 19:07

Would that hold true for those with very large pre tax IRAs, but wishing to make modest QCDs, or would recharacterization to Roth or even contribution removal generate a better result?  Of course, if the QCDs will be large enough to drain the pre tax amount or substantially reduce the pre tax %, at some point it would be best to take the annual RMD, then convert the entire remainder to a Roth, then make regular Roth contributions income permitting.

Submitted by David Mertz on Tue, 2019-12-31 19:35

Certainly someone in this situation could just not make a contribution to a traditional IRA.  The assumption in my previous post is that the individual has a reason to make a contribution to the traditional IRA, perhaps because they have a long-term goal of maximizing the amount they have in Roth IRAs and their MAGI makes them ineligible to contribute directly to a Roth IRA, so they’ll eventually convert everything that’s eligible to be converted.  If they have a desire to make QCDs but have no long-term goal of maximizing the amount in their Roth IRAs there are probably more tax-efficient ways to invest the money than to put it into a traditional IRA.

Submitted by Robert Wright on Wed, 2020-01-01 15:09

So, just to be clear.A person will need to keep track of cumulative contributions made to a deductible TIRA  made after 70.5.Correct?

Submitted by David Mertz on Wed, 2020-01-01 15:48

Yes, they’ll need to track cumulative *deductible* contributions made for the year they reach age 70½ and for the years after that.

Add new comment

Log in or register to post comments