Wednesday September 27, 2023
Case of the Week
Gifts from IRAs, Part 4
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 in his early 70s, Quentin understands that he will soon be taking required minimum distributions (RMDs) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin does not feel he needs the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.
Question:Having spoken with his advisor about making an IRA charitable rollover gift to charity, Quentin is excited to move forward. Quentin is preparing to send the IRA custodian a letter directing a distribution to his favorite charity when he remembers that he has a checkbook associated with his IRA account. Quentin wonders whether he could skip the step of sending a letter to the custodian and just write a check to the charity himself.
Solution:While it would not be permissible for Quentin to request a distribution to himself from the IRA and then write a check for the same amount to charity from his personal checking account, Quentin may use his IRA checkbook to make a qualified charitable distribution (QCD). The IRA distribution must be a direct transfer from the IRA custodian to charity.
IRS Notice 2007-7 answers a number of questions related to the QCD rules. In Question and Answer 41, the Notice states that, if a check from an IRA is made payable to a charitable organization described in Sec. 408(d)(8) and delivered by the IRA owner to the charitable organization, the payment to the charitable organization will be treated as a direct payment by the IRA trustee to the charitable organization for purposes of Sec. 408(d)(8)(B)(i). It would appear from the IRS Notice's explanation that the operative question is not whether the IRA owner has received physical possession of the check, but whether the check is payable to the IRA owner. This is a gray area, but it seems that as long as Quentin makes the check payable to his favorite charity rather than to himself, the distribution may qualify as a QCD.
The advisor also explained that if Quentin decides to send the charity a check from his IRA checkbook, he should do so well in advance of the end of the year. The mailbox rule usually allows checks sent on December 31 and received by a charity in January to count as a charitable gift in the year the check was mailed. However, the IRA charitable rollover is made "directly by the trustee" to a charitable organization. When the IRA owner writes a check and delivers it to charity, the custodian of the IRA has not yet made the transfer. The custodian in this case will only act once the charity has deposited the check. Therefore, if the IRA owner puts the check in the mail on December 28, the charity receives the check on January 2 and then the check is deposited on January 3, the QCD will not count as being made in December. Instead, the IRA owner will have made a QCD in January of the new year, as that is when the custodian's actions were made.
Quentin takes his advisor's words to heart and decides to write a check to charity from his IRA checkbook. He makes the check payable to his favorite charity and puts it in the mail early, well before December 31. The charity receives the check and acts promptly to deposit it before the end of the year, allowing Quentin to make his IRA charitable rollover before year's end.