Making a RMD and QCD from a Traditional IRA

Submitted by Victor Dudash on Thu, 2022-11-17 02:43

I have a Traditional IRA with both after tax amounts (contributions using Form 8606) and pre tax amounts (earnings). The total amount in the IRA is $200,000 with $50,000 after tax and $150,000 before tax so the pro rata is 25% after tax and 75% before tax. Next year at age 72 I will be taking a RMD of $20,000. Of this I want $10,000 to go to a QCD. I know when I take the total RMD $5,000 will be after after tax and $15,000 before tax. My question is will the QCD consist of $10,000 from the after tax amount of the RMD and the other $10,000 of the RMD (non QCD) consist of $5,000 before tax amount and $5,000 after tax amount? Or does the QCD also be a pro rata of the RMD, i.e, $2,500 after tax and $7,500 before tax? This would mean the QCD would not take advantage of the of the total $10,000 of the QCD not counting as income, only $7,500 would not count as income. In this scenario the other $10,000 of the RMD (non QCD) would consist of $2,500 after tax and $7500 before tax.

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Permalink Submitted by Alan - IRA critic on Thu, 2022-11-17 02:53

You would not report the QCD on Form 8606 (see line 7 Inst). That leaves the balance of the 10,000 RMD subject to pro rating on Form 8606. 25% of the 10,000 would be non taxable, and none of the QCD. Line 4a of Form 1040 would show the full 20,000 distribution, and line 4b will show the taxable amount of 7,500 with “QCD” shown on the line next to 4b. This will use up 2500 of your IRA basis, leaving 47,500 of basis remaining for future years on line 14 of Form 8606.

Permalink Submitted by Victor Dudash on Thu, 2022-11-17 11:34

Doesn’t the fact that I would be taking an RMD for $20,000 from my IRA mean I must follow the pro rata rules, in this case 25% or $5,000 post tax and $15,000 pre tax. $10,000 of this RMD would be going to the QCD and the other $10,000 for my personal usage? I would think that that I have to show $5,000 will be used up of my IRA basis leaving $45,000 of basis remaining for future years on line 14 of Form 8606.

Permalink Submitted by Alan - IRA critic on Thu, 2022-11-17 15:19

No, per Sec 408(d)(8)(D) attached below, a QCD is composed solely of pre tax IRA balances until such balance is exhausted. This is also consistent with the IRS Inst for completing Form 8606, line 7 as indicated above. The resulting breakdown of your example is as shown earlier.
(D)Application of section 72Notwithstanding section 72, in determining the extent to which a distribution is a qualified charitable distribution, the entire amount of the distribution shall be treated as includible in gross income without regard to subparagraph (A) to the extent that such amount does not exceed the aggregate amount which would have been so includible if all amounts in all individual retirement plans of the individual were distributed during such taxable year and all such plans were treated as 1 contract for purposes of determining under section 72 the aggregate amount which would have been so includible. Proper adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years.

Permalink Submitted by Victor Dudash on Thu, 2022-11-17 21:12

***1. In my case what would be the tax reporting if the total RMD I take, i.e., $20,000 was all going to a QCD? Would I not report any of the QCD on Form 8606 line 7 which would mean none of the RMD would be considered after tax because none of the RMD would be subject to pro rating? So would 1040 4a be $20,000 and 4b $0 with “QCD” shown on the line next to 4b, leaving my total IRA basis as $50,000 on line 14 of Form 8608 for future years. ***2. In short is the rule for an IRA made up of both pre and post tax amounts in which you want to take your RMD and have part of it going to a QCD as follows: 1). all the the QCD will be pre tax 2). the remainder of the RMD not going into the QCD will be pro rated (in my case 25% after tax and 75% pre tax) 3). the remainder of the RMD (not part of the QCD) pro rated as after tax (25%) will be used to lower the IRA basis remaining on Form 8606 line 14. 4) The total RMD taken (including the QCD portion, i.e. $20,000) will be the amount entered on Form 1040 line 4a. 5) The remainder of the RMD (not part of the QCD) pro rated as before tax (75%) will be the amount on Form 1040 line 4b with “QCD” shown on the line next to 4b.

Permalink Submitted by David Mertz on Thu, 2022-11-17 22:37

With a $180,000 balance in the IRA at the end of next year, $50,000 of basis and $10,000 of the $20,000 of distributions being a QCD, the nontaxable amount of the $10,000 distribution that was not a QCD will be $10,000 * $50,000 / ($180,000 + $10,000) = $2,632 (rounded), leaving $47,368 of basis in the traditional IRA.

Permalink Submitted by Victor Dudash on Fri, 2022-11-18 18:58

I understand now that when you have an IRA made up of both pre tax and after tax amounts and you want to take a QCD via a RMD as well as a RMD for personal use, the QCD RMD will be all pretax, i.e., no prorating. The other RMD for personal use would be prorated for the pre and after tax amounts. However, in my example where I have a $200,000 IRA with $50,000 after tax and $150,000 pre tax where I will be taking a $10,000 QCD using a RMD as well as a $10,000 RMD for personal use I was given two different ways of prorating the $10,000 RMD for personal use which yielded different results. Alan-iracritic@… (YOU WOULD NOT REPORT THE QCD) pro rated the $10,000 RMD for personal use as $2,500 after tax and $7,500 pre tax. He used the after tax percentage as 25% (50,000/200,000) and the before tax percentage as 75% (150,000/200,000). So after this my IRA would be $180,000 (200,000 – 10,000 QCD RMD – 10,000 personal RMD) with $47,500 (50,000 – 2,500 personal RMD) after tax and $132,500 (150,000 – 10,000 QCD RMD – 7,500 personal RMD) pre tax. DMx (WITH A $180,00 BALANCE IN) pro rated the $10,000 RMD for personal use differently. He prorated it as $2,632 after tax and $7,368 pre tax. He lowered the $200,000 IRA by $10,000 for the QCD pre tax taken out of it so he has the IRA being $190,00 with $50,000 after tax and $140,000 (150,000 – 10,000 QCD RMD) pre tax. He used the after tax percentage as 26.32% (50,000/190,000) and the before tax percentage as 73.68% (140,000/190,000). So after this my IRA would be $180,000 (200,000 – 10,000 QCD RMD – 10,000 personal RMD) with $47,368 (50,000 – 2,632 personal RMD) after tax and $132,632 (150,000 – 10,000 QCD RMD – 7,368 personal RMD) pre tax. Can you tell me which is correct for pro rating the $10,000 personal use RMD, i.e., $2,500 or $2,632 after tax?