Sequence of IRA distribution when donating to charity

Submitted by alberto vega on Tue, 2019-07-30 20:21

Individual 72 years old in 2019 has several non-deductible traditional IRAs. For one of the IRA’s the total 2019 RMD is $10,000.
He wants to donate $ 4,000 directly to his church from this IRA because he does not have enough deductions to itemize in 2019 . Does he have to donate all $ 4,000 to the church before he takes
any of the other $6,000 RMD for him to spend/invest.
Is this the way to be able to have a 1099 R issued showing a $ 6,000 taxable distribution and a $ 10,000 gross distribution and this way have less gross (and taxable) income in 2019.
Is there a particular code the trustee (bank) needs to indicate in box 7 of the 1099 R for 2019



Submitted by Alan - IRA critic on Tue, 2019-07-30 20:59

  • There is no special reporting for QCDs, the IRA custodian will simply issue a 1099R showing a distribution of 10000 with code 7 and show the taxable amount as 10000. The individual then shows the Form 8606 calculated taxable amount and enters “QCD” next to the applicable line 4. In this situation where the total RMD is not exceeded the QCD can be done before or after the other 6000 is distributed. For purposes of this paragraph, 10000 is treated as the total RMD for all accounts. For the actual numbers, the individual needs to determine the total RMD for all the IRA accounts and that figure will replace the 10000 used here.
  • There are no particular non deductible or deductible IRA accounts. The basis from non deductible contributions must have been reported on Form 8606 when the ND contributions were made, and they apply on a blanket basis over all the accounts. The QCD must come from the pre tax balance of all accounts, therefore the taxable amount after filing Form 8606 to report the non QCD distribution of 6000 will be somewhat less than 6000. In other words, the 4000 QCD is not shown on Form 8606. It does not matter which IRA accounts actually fund the RMD or QCD.
  • Another simpler way to address all these issues is once the total RMD for all accounts is determined, is to treat all the accounts as one combined IRA. 
  • Several issues are addressed here, so you might have more questions.

Submitted by alberto vega on Tue, 2019-07-30 21:23

I am confused now. Line 4 of FORM 8606 is contributions included on line 1. Line 1 is nondeductible contributions to traditional IRA in 2019.  Line1  would be $0. Therefore Line  4 would be $0.  There would not be any contributions in 2019.If I understand correctly beacause of the ratio method used in FORM 8606  computations, the actual taxable number would not be exactly $ 4,000 as the amount that would be excluded from gross income.Allright then assuming that only one non deductible IRA existed and the balance as of 12/31/18  would have been$300,000 FMV and cost $ 100,000 and the RMD for 2019 would be $ 10,000 and $4,000 was sent in 2019  directly by the custodian to a church.  The non- taxable ratio would be $ (10,000-6000)  X  100,000/300,000?

Submitted by alberto vega on Tue, 2019-07-30 21:40

The sentence”… the actual taxable number would not be exactly $ 4000….”  is incorrect.It should have read “…. the actual non- taxable number would not be exactly $ 4,000….

Submitted by David Mertz on Tue, 2019-07-30 22:59

  • The non-taxable amount of the total distributed that was not QCD, $6,000, would be $6,000 X ( $100,000 / $300,000) = $2,000.  The remainder of the $6,000 would be taxable.  The $4,000 that is QCD is not taxable and appears nowhere on Form 8606.
  • The Form 1099-R cannot distinguish between QCD and non-QCD distributions because the IRA custodian has no way to know for sure if the distribution qualifies as a QCD or not, despite the custodian satisfying the requirement that the payment be transferred directly to the charity.  All the custodian knows is the age of the IRA participant and that the payment was transferred properly, but those are not the only requirements for it to be a QCD.  Furthermore, the individual is not *required* to treat it as a QCD even if it does qualify, although I don’t know if there is any case where it would be beneficial not to treat it as a QCD.

Submitted by alberto vega on Tue, 2019-07-30 23:19

Thank you.  But if the 1099 R does not show the $ 4,000 QCD anywhere and is going to show $10,000 as gross distribution and $10,000 as taxable distribution, how is that shown in FORM 8606 to get the correct result which seems to be  $ 2,000 not taxable portion of the $6,000 ; $ 4,000 QCD (not taxable); $ 4,000 taxable portion  of the $6,000or is the FORM 1099 R going to show $ 6,000 as taxable and then the FORM 8606 will convert the $6,000 shown in the FORM 1099 R as taxable  to only $4,000 taxable via FORM 8606

Submitted by Alan - IRA critic on Wed, 2019-07-31 00:34

  • A 1099R must always show the full gross distribution as taxable (except corrective distributions) because the custodian does not know anyone’s IRA basis. That is between you and the IRS via Form 8606. Form 8606 documents additions to your IRA basis when you make the contributions and in years you take distributions calculates the non taxable/taxable portions of those distributions. Since a QCD is deemed to come from pre tax amounts only, any QCD distributions are not reported on Form 8606. Therefore, in this case the 8606 is only used to calculate how much of the 6000 is non taxable/taxable. The 4000 is non taxable because it is a QCD, so in this example line 4 of Form 1040 (the IRA portion on the revised line 4 starting 2019) will show 10,000 as the gross distribution and 4000 as the taxable portion. 
  • So how does the IRS know the amount of your QCD when it is not reported directly?  Apparently, they would need to subtract the amount showing on lines 7 and 8 of the 8606 from the 1099R amount. 

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