RMD & QCD Sequencing
My first year of RMDs. Am I correct in thinking that the “first dollar out” rule applies to any combination of QCDs and RMD distributions up to the RMD requirement for the year? E.g. I can take an RMD distribution then a QCD in 1Q and later more RMD distributions and QCDs until I satisfy the RMD requirement with all those QCDs counting tax free towards fulfilling the RMD requirement.
Out of interest, where is the “first dollar out” rule codified/stated in IRS regulations?
Thanks.
Permalink Submitted by Alan - IRA critic on Tue, 2022-01-11 23:48
You are correct, that the first dollars distributed from any account in an RMD distribution year must be applied against the RMD balance remaining. Therefore, it is important to complete all QCDs prior to completing all RMDs by a combination of prior QCDs and RMDs. If QCDs remain to be done after the total RMD is completed, these later QCDs will be non taxable, but will not reduce the taxes due on prior RMDs. For most people, it is simpler to just advise them to complete their QCDs first and they will have reduced the taxable RMD as much as possible. Other people who understand all the rules can of course intersperse QCDs and RMDs used for expense needs as long as all QCDs are completed before all RMDs.
The first dollar out being applied to the RMD is stated in IRS Reg 1.402(c)(2), QA 7. This rule is key to determining if any distribution is eligible for rollover, since an RMD never is. The same guidance also occurs in Reg 1.408-8, QA 4, specifically for IRAs. Link below:
26 CFR § 1.408-8 – Distribution requirements for individual retirement plans. | CFR | US Law | LII / Legal Information Institute (cornell.edu)