QCDs reduced by by IRA or 401k deductions after age 70 1/2
Please confirm regarding rule Secure Act update to tax code 408(d)(8)(D) – reducing tax-free QCDs by the amount of deductible contributions to an IRA or 401k made after age 70/12. Does this apply to employee contributions, employer contributions, or both? Has this been enforced and/or are there any private letter rulings regarding the same?
Permalink Submitted by Alan - IRA critic on Tue, 2024-05-28 16:09
This anti abuse rule only applies to IRAs because QCDs are limited to IRAs. If you have an IRA basis from non deductible contributions, because a QCD can only be applied to the pre tax IRA balance, your IRA basis will not be a portion of any QCD.
Since the Secure Act Regs are only proposed at this point, I doubt that there has been any active enforcement of the anti abuse rule because there is no easy way for the IRS to determine if your reported QCD has already been reduced by you, or if you failed to do so.
This anti abuse rule is another example of unnecessary complication of the tax code relative to the benefit Congress expected to get from it. In other words, how many people that are well off enough to do QCDs have an IRA balance that is so small that they have to draw from contributions they made after age 69.5?
In any event, after that age you should probably make Roth contributions if your income is not too high.
Permalink Submitted by Marc Usem on Wed, 2024-05-29 14:16
Thank you for your note. I’m not clear on your answer. While it may be a complication it appears to be part of the code? Is this not actually law and only proposed? Based on the information in 408(d)(8)(d) it appears to apply to deductible IRA contributions made after age 70 1/2 so basis would not be a consideration. It also appears to apply to 401(k) contributions made after age 70 1/2 that are rolled into an IRA and a subsequent QCD made from the IRA.
From Kiplinger and ChatGPT –
There’s a complex rule for people who make deductible IRA payins after 70½. Essentially, these IRA contributions reduce your allowable tax-free QCD amount until they are used up. Here’s a simple example: A 74-year-old working woman wants to do a QCD for the first time in 2024. For 2020, 2021, 2022 and 2023, she made deductible contributions to her traditional IRA totaling $28,500. If the woman transfers $25,000 of IRA money to charity in 2024, the full $25,000 is taxable to her because it is less than the $28,500 of post-70½ deductible payins. Let’s say that in 2025, she then transfers $20,000 to charity directly from her IRA. $16,500 will be a nontaxable QCD, and $3,500 will be treated as a normal payout.
This commentary highlights the interaction between making deductible contributions to a traditional IRA after age 70½ and the impact on Qualified Charitable Distributions (QCDs). Here’s a breakdown of the example provided:
Scenario: A 74-year-old woman has been making deductible contributions to her traditional IRA after age 70½ and wants to make a QCD in 2024.
Contributions: From 2020 to 2023, she made deductible IRA contributions totaling $28,500.
First QCD:
In 2024, she transfers $25,000 from her IRA directly to a charity.
Since her total post-70½ deductible contributions amount to $28,500, the $25,000 transferred to charity does not qualify as a tax-free QCD. Instead, it is treated as a taxable distribution.
Second QCD:
In 2025, she makes another transfer of $20,000 from her IRA to a charity.
At this point, the deductible contributions not yet offset by QCDs are $3,500 ($28,500 – $25,000).
Therefore, $3,500 of the $20,000 transfer is treated as a normal taxable distribution.
The remaining $16,500 is a tax-free QCD.
Key Points:
Deductible Contributions Post-70½: These reduce the amount of IRA funds that can be treated as tax-free QCDs.
Taxable QCD: Until the total deductible contributions post-70½ are offset by equivalent QCD amounts, any QCDs made are taxable.
Calculation: Always subtract previous deductible contributions from QCDs to determine the tax-free portion.
This rule aims to prevent double tax benefits—deducting IRA contributions while also excluding QCDs from taxable income.
Permalink Submitted by Alan - IRA critic on Wed, 2024-05-29 20:39
Yes, I agree that this has been incorporated into the tax code and is not part of the proposed Secure Act Regs which basically deal only with RMD rules. Therefore, the IRS could enforce the provisions of Sec 408(d)(8), although the IRS will not know whether the taxpayer has correctly reduced applicable QCDs without a request for documentation or an audit. This will not be evident from the 1040. The IRS would also need to track the cumulative amounts of such deductions added each year and reduced by applying the reduction to QCDs claimed. Therefore, enforcement of this provision will require considerable extra tracking systems at the IRS and/or enhanced QCD reporting by IRA custodians through a 1099R special distribution code or similar measure.
While a QCD cannot be made prior to age 70.5 to the day, any deductible IRA contribution made prior to that day but in the year that age 70.5 is reached is subject to reduction along with later year IRA deductions.
Non IRA pre tax contributions (eg 401k) are not subject to Sec 219, therefore if a 401k is rolled over to an IRA, a QCD can be done from the IRA with no reduction unless a deductible IRA contribution had been made to the IRA per Sec 219. Of course, any 401k RMD required would have to be distributed before the rollover, and the IRA RMD would be limited to that calculated from the prior year end IRA balance, so if there was no prior IRA balance, doing a QCD from the IRA would not reduce taxation of the 401k RMD. The IRA QCD would then save the taxpayer more tax dollars if it was postponed to the year after the 401k rollover.
IRA basis is only a consideration in determining the non taxable portion (Form 8606) of distributions in excess of QCDs. Actual QCDs are not reported as distributions on line 7 of Form 8606.
Permalink Submitted by Marc Usem on Fri, 2024-05-31 14:43
Thank you for the clarification – would this also apply to SEP IRAs ?
Permalink Submitted by Alan - IRA critic on Sat, 2024-06-01 01:52
Not for SEP IRA contributions, but a personal IRA contribution can be made to a SEP IRA account, and if the personal contribution is deducted at age 70.5 or later, QCDs will be reduced. It is safer to not make personal contributions to a SEP IRA due to the risk that the contribution will be miscoded by the custodian which then requires corrective transactions.
As for the QCD distribution, it must come from a traditional IRA, or a SIMPLE or SEP IRA which is no longer an “on going” account receiving contributions.