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Sunday September 25, 2022

Case of the Week

Gifts from IRAs, Part 1

Case:

Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now, as he approaches his 70th birthday, Quentin knows that at age 72 he will be taking required minimum distributions (RMDs) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin does not feel as though he needs the additional income that the IRA distributions will provide - especially with the increased taxes tied to that income.

Question:

Quentin has made numerous charitable donations throughout the years and has enjoyed the benefit of the income tax deduction from those donations. On his 70th birthday, Quentin decides that he should have a conversation with his CPA. He recalls hearing something about using his IRA to make charitable gifts at age 70. Before taking action, however, Quentin decides to call his tax advisor and asks him if this is the best course of action. Is there a better way for Quentin to accomplish his goals?

Solution:

IRA owners who reached the age of 70½ prior to 2020 were required to take distributions starting at age 70½. Quentin's tax advisor explains that, with the change in the tax law from the SECURE Act, Quentin is not yet required to take distributions from his IRA because he turns 70½ after January 1, 2020.

By April of the year after the owner of a traditional IRA reaches age 72, the IRA owner will be required to take a distribution of a minimum amount from his or her IRA. All subsequent RMDs must be taken each year by December 31. The RMD under the Uniform Table is calculated by dividing the balance of the IRA at the end of the previous calendar year by the adjusted life expectancy factor of the owner. The product is the amount of the RMD that must be taken by December 31. This RMD amount is taxable as ordinary income to the IRA owner.

If Quentin wanted to make a gift to charity now at age 70 from his IRA, he could, but he would be taxed on the distribution. However, he would also receive a charitable income tax deduction. Based on his retirement income, Quentin lives comfortably, but his advisor reminded him that he is no longer itemizing his deductions on his tax return. Quentin's advisor also noted although the SECURE Act changed the RMD rules, Quentin could wait a few more months when he reaches age 70½ and make a tax-free distribution of up to $100,000 directly to charity. Quentin understands that making a gift before age 70½ from his IRA would increase his income taxes. Quentin decides to delay his contribution for another few months to be eligible to make a QCD.

Published July 8, 2022
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