QCD

Submitted by ShipsnGiggles on Thu, 2018-08-30 16:05

QCDs are not subject to pro-rata distributions, and that distributions that QCD-qualify are taken from pretax funds first, instead of from pre-tax and after-tax funds proportionately.
Traditional IRA was funded with both pre-tax and after-tax monies over many years so my RMD’s have been split proportionately and reported to the IRS 8606
This year I would like to do the following – QCD first then take the remainder of the RMD in a separate distribution.
The IRA custodianh doesn’t track of pre and post-tax contributions so the QCD amount would simply come out of my account balance.

Question
how do I ensure that a QCD is taken from pretax funds only?
How the RMD reported ensuring it is taken pro-rata?

Thank you



Submitted by David Mertz on Thu, 2018-08-30 17:36

  • The amount that is pre-tax in an individual’s IRAs is the amount that would be taxable if the entire balance in all of the individual’s traditional IRA was distributed during the year and is the maximum amount that can be a QCD.  Anything transferred to charity in excess of the pre-tax money in the individual’s IRAs (perhaps as part of the same transfer as the QCD) is not a QCD and is instead deductible on Schedule A.  Since the basis in nondeductible contributions is not affected by investment performance, any gains or losses in the individual’s IRA change the amount of pre-tax money in the IRAs and the actual maximum amount that can be a QCD cannot be known until year end (unless the pre-tax amount is sufficiently high that investment losses will not be expected to reduce the pre-tax money in the IRAs below the $100,000 annual QCD limit or whatever contribution the individual is planning to make).
  • QCDs are omitted from the distributions reported on line 7 of Form 8606, so they are not involved in the pro-rata calculation for any other, non-QCD distributions.

Submitted by Ben Meyer on Fri, 2018-08-31 18:46

DMx, your description makes it clear that there is a risk with a QCD distribution if the amount of pre-tax funds in the IRA is only slightly higher than the amount of the QCD.  Even though the available pre-tax in the IRA may support the QCD at the time it is made, a downward fluctuation of the remaining assets may put the amount of pre-tax below the QCD amount at year end.  By your description, the QCD would then be partially or totally invalid after the fact.  Is there any rule for QCDs that would keep them valid if the pre-tax amount was sufficient at the time the QCD was made, and in the specific IRA account from which the QCD was taken (without aggregation)? 

Submitted by Alan - IRA critic on Fri, 2018-08-31 19:00

Benn, good analysis however there is no such relief rule for QCDs. At least, I think that this combination of circumstances would be quite rare, but should the taxpayer be aware of this exposure, they would probably distribute their RMD and QCD late in the year.  They might also want to consider whether they can itemize or not as the new std deduction will eliminate itemizing for many taxpayers.

Submitted by David Mertz on Fri, 2018-08-31 19:45

  • The situation of the amount of the contribution being more than the amount that can be claimed as QCD is somewhat of a non-issue since the portion that can’t be claimed as a QCD isn’t taxable anyway (since it’s the portion that is basis).  The only issue real is that the individual had the custodian transfer more to charity than was necessary to avoid the IRA distribution being partially taxable.
  • Beyond that, the issue of treating more of the distribution as QCD than the pre-tax amount has more to do with tax software (or the individual) handling the tracking of basis and treating the basis portion as a Schedule A deduction.  The tax software that I’m familiar with doesn’t detect this situation so it omits from Form 8606 more of the distribution than is permitted, incorrectly inflating the amount of basis that carries forward (Form 8606 line 14) and omitting a potentially beneficial Schedule A deduction.  The developers of that software have deemed this to be an acceptable shortcoming of the software (or user error).

Add new comment

Log in or register to post comments