IRA’s with QCDs, RMDs and Tax Contributions

This week’s Slott Report Mailbag looks into beneficiary IRA’s with specific examples when over or under 70 1/2 years old with QCDs, RMDs as well as pre and post tax contributions. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question: Can a beneficiary IRA be donated to a qualified charity if the beneficiary is over 70 ½? – Carol

Answer:  Individuals, including beneficiaries who were named on the beneficiary form, who are at least 70 ½ years old on the date of the transfer can do a qualified charitable distribution (QCD) of IRA funds directly to a qualifying charity. There is a cap of $100,000 per individual, per year. The QCD amount is not included in the individual’s income for the year and they cannot take a charitable deduction for the amount transferred.

If the beneficiary wants to donate more than $100,000 to charity, anything over that amount would be considered a taxable distribution to the beneficiary. The beneficiary can then take a charitable deduction on their tax return.

Question: A client was notified recently that her late husband had an IRA.  The client is 66 years old.  Her husband passed away 15 years ago and named his wife 34% beneficiary, and left 33% to each of his children as well.  Given the account was lost for 15 years, how will this be treated if the account is divided between the spouse and two children.  RMD’s have not been taken from each child etc.

Each of the children would like to disclaim the IRA and have it all go to their mother.  IS this possible so late after death? – Mark

Answer:  It is not possible to do a disclaimer. A disclaimer must be done within nine months of the date of death.

The children can stretch distributions from their inherited IRAs only if the IRA agreement allowed for a stretch at the time of the account owners death. When calculating the RMDs keep in mind that the distribution rules changed in 2002 and the life expectancy tables changed in 2003. RMD calculations prior to those years will need to use the old rules. All IRA distributions are taxable in the year of distribution.

The spouse can move her share of the inherited IRA to an IRA in her own name. There is no deadline for doing this. All individuals should be sure to name beneficiaries on their IRA accounts.

Question: I attended Ed Slott’s session in Atlanta in July. I have a client that has several IRA’s, one of which has both pre and post tax contributions. Can he convert the Post Tax Contributions to a Roth Account? – Kevin

Answer:  No. Post-tax amounts cannot be separated when doing a Roth IRA conversion. The pro-rata rule will apply. All IRAs are considered to be one big IRA for the pro-rata rule. A distribution will be partly taxable and partly tax free. This is what we call “the cream in the coffee” rule. Once cream is put in the coffee, you can never get just the cream out again. The same is true with IRAs. Once you put post-tax funds in an IRA, you can never get just the post-tax funds out. Let’s say you have $300,000 in all your IRAs, SEP IRAs and SIMPLE IRAs. Of this amount $30,000 is post tax. 10% of the account is post tax. A distribution of $30,000 would be 10% tax free and 90% taxable. $3,000 would be tax free and $27,000 would be taxable.