QCD and 60 Day rollovers

Submitted by Patrick McGinty on Wed, 2014-05-21 15:40

Client is RMD age and completed a QCD for $3,000 in 2013. 7 days later we rolled back $2,090 into his IRA from a taxable account in order to get his total distributions equal to his RMD. Did we make a mistake? Can a 60-day rollover be made for a charitable distribution?

In a similar situation but for a different client we distributed her full RMD $67,000, then learned the client wished to do a $50k QCD as well. We did a 60 day rollover for $50k before we completed her $50k QCD thus effectively keeping her total distributions equal to her RMD at $67k. Does the IRS have a problem with this strategy? Technically we were rolling back part of the $67k distro as it was within 60 days of that transaction.

Thanks,



Submitted by Alan - IRA critic on Wed, 2014-05-21 17:19

  • There is a real problem here. If the client wants the QCD to cover all or part of the RMD, it should be done first, and then the rest of the RMD should be distributed. Rollovers are not part of this process because a distribution cannot be rolled over until after the RMD has been completed. In the first case, if the total RMD is 5,090, the 3,000 QCD should be followed by a distribution to the client for 2090. What was the point of depositing money INTO the IRA? If this was reported as a rollover contribution, it is not allowable because an RMD distribution (both the QCD and the 2090) is not eligible to be rolled over. The contribution must be removed as an excess regular IRA contribution.
  • For example 2, the RMD was satisfied by the 67,000 distribution and cannot be undone. Client can still do a QCD, but it will be in addition to the RMD, not instead of it. In this case, the RMD had already been fully completed, and because it was an RMD none of it can be rolled over. The 50k deposit is an excess contribution per the above. And it sounds like more than 60 days has passed since the last distribution of the 50k QCD. If not, I suppose the QCD distribution could be replaced in the IRA within 60 days, but then she would not have a QCD to report. She would just have a direct 50k charitable distribution which could be itemized as a charitable deduction.
  • Both of the above are a bad mix of apples and oranges, where the various transactions were done out of order. Don’t know what the status is of the 2013 tax return in first example. Is the second case also in 2013?

Submitted by Patrick McGinty on Wed, 2014-05-21 21:24

To clarify on the first scenario:

  • 1 – total RMD was $17,910, $17,000 of this was distributed in January of 2013.
  • 2 – Charity Distro of $3k completed in September of 2013
  • 3 – Given the client exceeded their RMD by $2,090 we decided to roll back that amount within 60 days of the $3k charity distro.

Was this allowable? To clarify on the 2nd Scenario:

  • 1 – All of this happened in 2013
  • 2 – one-time distribution of $67k occured in August (happens to be the total RMD needed for the year)
  • 3 – $50,000 was rolled back in via 60-day rollover
  • 4 – After the 60-day rollover was completed, $50k was distributed as a QCD.

Net distributed from IRA = $67,000, only $17,000 is taxable. Is this right? 

Submitted by Alan - IRA critic on Thu, 2014-05-22 01:33

  • 1st scenario – believe it or not, this is the first fact pattern of this nature that has been reported here. But client should be OK because the rollover did not include RMD amounts and the client’s other funds can be used to complete a non RMD rollover within 60 days. This is frequently done when a taxpayer has funds withheld from an IRA distribution and then replaces those funds with their own money. The IRS still has the withholding. Same situation here except the charity still has the 3,000 QCD and the rollover of the amount in excess of the RMD was done with other funds. It is critical that client reports this correctly on Form 1040 showing the gross distribution of 20,000 per the 1099R on line 15a, the taxable amount of 14,910 on 15b and “QCD” and “rollover” entered on the line next to 15b. (3,000 for the QCD and 2.090 for the rollover). These figures assume client has no basis in his TIRAs and is not in violation of the one rollover limitation per 12 months from this particular IRA account.
  • Second scenario – not so lucky. Here, the client did the rollover of RMD money, unlike scenario 1 where the rollover was done with funds in excess of the RMD. Walking this through, step 3 included RMD money so the 50k was not eligible for rollover. The rollover is treated as an excess regular IRA contribution which must be removed with allocated earnings. Earnings will be taxable in 2013. This must be completed no later than 10/15/2014 to avoid a 6% excise tax on the excess contribution of 50,000. The RMD is still considered satisfied despite the disallowed rollover. Then came the QCD, none of which can be applied to the RMD. But it is still a QCD because a QCD does not have to cover any of the RMD, it is just much more beneficial if it does. Reporting in this case will be the 1099R total of 117,000 of line 15a plus the amount of the excess contribution distribution for which the 1099R will be issued next year but taxable in 2013, taxable amount of 67,000 plus the earnings on the excess contribution corrective distribution on 15b, with “QCD” entered next to 15b. Since the taxable amount will be the full amount of the RMD, the QCD will not cover any of the RMD, but will not be taxable. An explanatory statement regarding the amounts and dates of the excess contribution should be included with the 2013 return. If not extended, an amended return 1040X will be required. 

Submitted by Patrick McGinty on Thu, 2014-05-22 20:40

What is the reference of the IRS publication and section that outlines the issue you point out in scenario 2? I didn’t know that RMD money couldn’t be rolled back in 60 days even if the full RMD is satisfied by year end. That’s new to me. So the first funds out of the IRA are considered RMD funds, meaning there is no grace at all for a mistaken distribution (i.e. completed earlier in the year than intended) under the RMD amount once you’re 70.5? Seems odd.Don’t think it changes the situation any, but in scenario 2, the full $67k was actually withheld entirely for taxes.Thanks for your help.

Submitted by Alan - IRA critic on Thu, 2014-05-22 22:23

 

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