Different types of distributions from IRA

Submitted by alberto vega on Fri, 2019-01-11 07:08

Married husband age 71 will be in 22% tax bracket in 2019 has a non-deductible traditional IRA’s cumulative cost (ie amount contributed over the years)
about total cost basis of $ 100,000; total market value $300,000 as of Dec 31, 2018.
1. Wants to convert before 12/31/19, about $7,000 to $ 10,000 of cost basis from the non-deductible traditional IRA with a cumulative cost (basis) and market value as noted above. The IRA investment is in a CD. The investment will also be in a CD in the Roth IRA

Tax rate in 2019 will be 22%. Therefore what does he pay tax on if he converts $10,000; the $10,000 cost basis of his non-deductible traditional IRA ? So is the tax $10,000/100,000 x 22%. It is important to know because if the conversion is taxable at more than $10,000 it could put his taxable income over the 22% tax bracket.
When is the best time during 2019 to do this conversion
What code for this transaction should be reflected in FORM 1099 R

2. Wants to also make a $1,500 quarterly donation from the regular IRA to an approved charity. Total $6,000 in 2019. Will instruct IRA administrator (a bank) to make a check payable to the charity but delivered to taxpayer. Is that permissible?
3. Wants to take his 2019 RMD which is expected to be $10,000. Therefore I assume after his $6,000 of the RMD is withdrawn
as a contribution, the remaining $ 4,000 (10,000-6000) could be taken at any time during 2019?
Or is it required to be taken at a particular time
4. Is there a particular priority sequence in which these disbursement need to be taken



Submitted by Alan - IRA critic on Fri, 2019-01-11 16:26

  1. All of his non Roth IRAs are included on Form 8606 to calculate the taxable amount of the conversion. The IRA basis is the non taxable portion and that 100,000 should have been reported on Form 8606 for the years the contributions were made. If the ratio of IRA basis remains the same at the end of 2019 as it is now, and adjusted for the QCD being all pre tax, then 66% of the non QCD distributions (14,000) will be taxable or about  9,240. QCD of 6,000 totally tax free.  It does not matter when in 2019 the conversion is done but it must be AFTER QCDs and RMDs are completed. Both the RMD and the conversion will be combined on the 1099R and coded 7 in Box 7. There is no special coding for a QCD and will be part of the total distribution of 20,000. Note that the QCD portion is NOT reported on Form 8606 as it is considered 100% pre tax dollars.
  2. Yes, but doing a QCD and a conversion requires correct timing if he wants to QCD to be part of his RMD. The simplest order is to do the entire QCD first (not quarterly), then take the remainder of his RMD, and do the conversion last. This will also avoid the hassle of 4 QCD checks. But if he wants to quarterly QCD checks and quarterly RMD, he could do a 1500 QCD and a 1,000 RMD (2 checks each quarter) and would wind up with 6,000 of QCD and 4,000 of RMDs. That is 8 checks issued, so he must be very careful not to mess up. Also, he should do these mid quarter so that his final 2 checks are distributed no later than mid November. When this is all completed, he does his conversion. OK to have QCD checks mailed to him for delivery but they must be made payable to the charity.
  3. He could do it this way (rest of RMD after all QCDs) or all quarterly as suggested above. This way would reduce the number of checks to 5, but he is getting his spendable RMD late in the year.
  4. Covered above.  Note that because the QCD is all pre tax, it does not show as a distribution on Form 8606. Therefore, Form 8606 would report a 10,000 conversion on line 8 and the 4,000 balance of RMD on line 7. Taxable % would be somewhat less than mentioned above because the 6,000 in QCDs are not taxable.
  5. This combination of transactions is complex to execute and report, so hope he has a competent tax preparer familiar with Form 8606 and QCDs.

Submitted by alberto vega on Mon, 2019-01-14 16:49

So the $ 20,000 distribution split betwenn $6,000 QCD, $4,000 regular RMD and $ 10,000 conversion to Roth will all be reported on FORM 1099 R as gross distribution but only $ 14,000 (4000 + 10,000) will be reported as taxable distribution?Would there be special codes listed in Box 7 of Form 1099  to properly report that only the $ 14,000 should be taxable in 2019.  And what wold be those codes.I am trying to instruct the bank to prevent  incorrect reporting and have to fight the bank later

Submitted by Alan - IRA critic on Mon, 2019-01-14 18:03

The total distribution would be coded 7 on the 1099R  (normal distribution). The bank has no other options.  There is no unique QCD code provided by the IRS and the taxpayer must self report the QCD on Form 1040. This is similar to how a rollover would be reported except “QCD” should be entered next to line 4b on Form 1040. That removes the QCD from taxable income. The conversion goes on Form 8606. Since this IRA includes basis, considerably less than 14,000 will be taxable as explained earlier. 

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