How do QCDs relate to RMDs?

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oaksavannah
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How do QCDs relate to RMDs?

Post by oaksavannah » Sat Dec 02, 2017 9:18 am

Can one make QCDs if the total amount of funds withdrawn from one's traditional IRA exceed the RMD?

Is there an ordering or sequencing rule that determines the tax consequences of doing so?

In my own case, preparing for 2018 tax year:

My 2018 RMD will be about $65K, which I will withdraw and use for my annual expenses.
I would like to make QCDS of $20K from my traditional IRA in addition to the RMD.

The Kitces article ( https://www.kitces.com/blog/qualified-c ... uirements/ )
which has been mentioned on the Forum says:
"One important caveat of using a QCD to satisfy an RMD obligation, though, is that an RMD
is presumed to be satisfied by the first distribution that comes out of the IRA for the year."

I don't understand what that means.

Does that mean that ALL of my QCDs for the year must be made as part of the first withdrawal?
Can I make additional withdrawals during the year, exceeding the RMD amount, without triggering a tax on the QCDs?

This year, before I realized that my tax rate was about to increase, I withdrew the total amount, $85K,
from the IRA and made contributions directly to charities and will use them as deductions on Schedule A.
I would like to use the QCD option next year to lower my AGI. I am currently 70.5 yrs old.

The IRS response to the topic of QCDs is a voice message saying that this topic is addressed during the tax season.
I'd really appreciate some insight before then as I prepare for 2018.
Thanks in advance for your consideration!

livesoft
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Re: How do QCDs relate to RMDs?

Post by livesoft » Sat Dec 02, 2017 9:32 am

oaksavannah wrote:
Sat Dec 02, 2017 9:18 am
"One important caveat of using a QCD to satisfy an RMD obligation, though, is that an RMD
is presumed to be satisfied by the first distribution that comes out of the IRA for the year."

I don't understand what that means.

Does that mean that ALL of my QCDs for the year must be made as part of the first withdrawal?
Can I make additional withdrawals during the year, exceeding the RMD amount, without triggering a tax on the QCDs?
Not exactly.
I think that means that ALL of your QCDs for the year must be made first, but that means you can have
1. QCD 1
2. QCD 2
3. QCD 3
4. withdrawal that is not a QCD 1, but part of remaining RMD
5. another withdrawal that is not a QCD, but part of remaining RMD
6. ....
7. Withdrawal that is not a QCD and not part of any RMD since RMD has been previously satisifed
8. More withdrawal like the previous (#7)
9. ...
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kaneohe
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Re: How do QCDs relate to RMDs?

Post by kaneohe » Sat Dec 02, 2017 10:04 am

My interpretation is that you can do QCDs as part of the RMD or not up to the max limit (100K/yr?) . However if you want to minimize the withdrawal from TIRA to RMD only, then the QCDs must be part of the RMD (the first withdrawals). The words are confusing so some clarification might be helpful.
Your RMD is 65K. If you want to withdraw only 65K for the yr, then you can do the QCD and the RMD (non QCD) in any order:
1) 30K RMD (non QCD)
2) 20K QCD
3) 15K RMD (non QCD) or any variation of these 3

However, if you do your entire regular RMD first
1) 65K RMD (non QCD)
then if you want to do a 20K QCD, you can do that but now will have withdrawn a total of 85K from the TIRA.
You only need to declare 65K as income (20K QCD not reported as AGI). However if you had done it as in the first example, you only declare 45K as income.

In your case, you say that you need 65K to live on and QCDs will be extra. In that case, I don't think it makes a difference how you order the withdrawals. You made one statement that is a bit confusing.........you made contributions "directly" to charities...............for purposes of the QCD the contribution checks must come from the TIRA "directly" (they must be made out to the charity by the broker, although they can be mailed to you) and they reduce your income but you cannot take a deduction on Sch A. I seem to recall that some brokers now allow you to write checks on the TIRA to the charities which would also be QCDs. However if you get a check from the TIRA to yourself, deposit that check in your personal (non IRA) account and then write checks from that personal account to the charity, that would not be a QCD.

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Last edited by kaneohe on Sat Dec 02, 2017 10:15 am, edited 1 time in total.

livesoft
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Re: How do QCDs relate to RMDs?

Post by livesoft » Sat Dec 02, 2017 10:11 am

I disagree with kaneohe. I think it makes a big difference in the order, if for no other reason not to confuse your IRA custodian.

I haven't done the research, but looking at fairmark.com or kitces.com might be worthwhile, too:
For instance: https://www.kitces.com/blog/qualified-c ... uirements/
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oaksavannah
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Re: How do QCDs relate to RMDs?

Post by oaksavannah » Sat Dec 02, 2017 10:18 am

Nice explanation. I think actually get it.

I must request all the QCDs before I withdraw the non-QCD portion of the RMD.
Then I may make additional IRA withdrawals as needed after the RMD has been satisfied.

I like this. It appeals to my practice of setting money aside for charity off the top of my income.

Thank you for your graphically lucid response, very helpful!

Chip
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Re: How do QCDs relate to RMDs?

Post by Chip » Sat Dec 02, 2017 10:22 am

I agree with kaneohe. The order makes no difference when the sum of QCDs plus other withdrawals = RMD. The IRA custodian shouldn't be confused as they know the amount of the RMD, when withdrawals took place, which withdrawals were QCDs since those checks have to be made out to the charities.

As kaneohe points out, it's a different story if the sum of QCDs plus other withdrawals > RMD. Then the order can matter.

pshonore
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Re: How do QCDs relate to RMDs?

Post by pshonore » Sat Dec 02, 2017 10:28 am

livesoft wrote:
Sat Dec 02, 2017 10:11 am
I disagree with kaneohe. I think it makes a big difference in the order, if for no other reason not to confuse your IRA custodian.

I haven't done the research, but looking at fairmark.com or kitces.com might be worthwhile, too:
For instance: https://www.kitces.com/blog/qualified-c ... uirements/
The custodian won't be confused because they just add up all the distributions and put it on a single 1099R; its your job to enter the numbers correctly into the tax software

livesoft
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Re: How do QCDs relate to RMDs?

Post by livesoft » Sat Dec 02, 2017 10:33 am

OK, I see.

But how about this: Late in the year, you decide to take more money out than the RMD even though that is not what you intended to do earlier in the year. What happens then if you did QCDs after some of your other withdrawals?
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pshonore
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Re: How do QCDs relate to RMDs?

Post by pshonore » Sat Dec 02, 2017 10:36 am

oaksavannah wrote:
Sat Dec 02, 2017 10:18 am
Nice explanation. I think actually get it.

I must request all the QCDs before I withdraw the non-QCD portion of the RMD.
Not really; lets say your RMD is 30K and you want to make a QCD of 10K. You can withdraw 20K and move it to taxable. You can still make a QCD of 10K. However, If you want your entire RMD to be satisfied by QCDs then you must make those QCDs first.

clydewolf
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Re: How do QCDs relate to RMDs?

Post by clydewolf » Sat Dec 02, 2017 10:41 am

In January 2019, the OP will receive a1099-R from his IRA custodian. That will show $85,000 being distributed and a code 7 in box 7.

On the OP's 2018 1040 line15a the $85,000 will show. Line 15b will show $65,000 with a note QCD in the margin for the line.
The $20,000 QCD is kept out of the income column. This charitable contribution can not be claimed on Schedule A.

The first distribution from an IRA goes toward satisfying the RMD. The QCD does not need to be part of the RMD but the QCD may be part or all of the RMD.

clydewolf
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Re: How do QCDs relate to RMDs?

Post by clydewolf » Sat Dec 02, 2017 10:49 am

livesoft wrote:
Sat Dec 02, 2017 10:33 am
But how about this: Late in the year, you decide to take more money out than the RMD even though that is not what you intended to do earlier in the year. What happens then if you did QCDs after some of your other withdrawals?
When the RMD is satisfied, and then a QCD is made, the distribution that went to a QCD does not get counted in the taxable income.

The QCD does not need to be part of the RMD but it is a nice feature to know that your contributions can be counted as RMD dollars.

technovelist
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Re: How do QCDs relate to RMDs?

Post by technovelist » Sat Dec 02, 2017 10:52 am

This article looks like a good explanation: https://www.forbes.com/sites/davidmarot ... fc6ce741f1
In theory, theory and practice are identical. In practice, they often differ.

Alan S.
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Re: How do QCDs relate to RMDs?

Post by Alan S. » Sat Dec 02, 2017 2:25 pm

It is also important to factor in the IRA RMD aggregation rules if you have more than one non Roth IRA.

For example, if you complete your RMD for IRA #1, then do a QCD from that same IRA, the QCD will count toward the RMD for IRA #2.

At the beginning of the year, you should develop a plan to recognize the amount of your total RMD, the amount of your QCD, and the amount of any additional conversions you may want to do. Generally, the conversion must be done last and the QCD first but there are exceptions. If you don't plan you will likely mess up and cost yourself additional taxes or a higher IRA distribution than you needed to take, or both. However, if you don't plan well you might also luck out and fall into one of the exceptions that bails you out. Best not to depend on luck.

oaksavannah
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Re: How do QCDs relate to RMDs?

Post by oaksavannah » Sat Dec 02, 2017 10:11 pm

Dear Responders,

Thank you for your thoughtful clarifications, questions, cautions, referrals, and links in addressing both the details and the big picture.
Thank you for your generosity!

Lynette
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Joined: Sun Jul 27, 2014 9:47 am

Re: How do QCDs relate to RMDs?

Post by Lynette » Sat Dec 02, 2017 10:25 pm

If the OP's questions are answered, may I ask another one related to QCD's. Is it correct that a QCD can only be taken from an IRA and not a 401K? In that case I would have to rollover my 401K to an IRA. Can I do a rollover in 2018 before I've done an RMD? Its already late in the year and time is limited to do a rollover. I think that my company will only do it via mail - little horrifying to think of a check that size so I may do it in smaller chunks.

kaneohe
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Re: How do QCDs relate to RMDs?

Post by kaneohe » Sat Dec 02, 2017 11:34 pm

Sounds like you are correct about QCDs and IRAs https://www.irahelp.com/slottreport/5-t ... 0%99t-401k
You can't take QCDs from 401Ks.

If you are > 70.5 , sounds like you have to take the RMD before rolling over https://www.irahelp.com/forum-post/1913 ... fter-70-12

RetiredCSProf
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Re: How do QCDs relate to RMDs?

Post by RetiredCSProf » Sun Dec 03, 2017 3:48 pm

I have a related question. I will turn 70-1/2 in 2018. I have three tIRA accounts. I'm planning to take withdrawals in the following order:

1) wait until I have turned 70-1/2 to take QCD from tIRA account #1 (take amount equal to the RMD for account #1)
2) Next, take RMDs from tIRA accounts #2 and #3
3) Next take a Roth conversion from tIRA account #2

I plan to wait until Nov 2018 to decide whether to take my initial RMDs in 2018, or delay until Jan - April 2019 (due to possible capital gain event in 2018).

Question #1:
I understand that delaying the RMDs would restrict me from taking a Roth conversion in 2018, but would I still be able to take the QCD in 2018?

Question #2:
If I take a standard deduction (I have always itemized, but rules are changing), can I use QCD in lieu of itemizing a charitable donation?

pshonore
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Re: How do QCDs relate to RMDs?

Post by pshonore » Sun Dec 03, 2017 4:09 pm

RetiredCSProf wrote:
Sun Dec 03, 2017 3:48 pm
I have a related question. I will turn 70-1/2 in 2018. I have three tIRA accounts. I'm planning to take withdrawals in the following order:

1) wait until I have turned 70-1/2 to take QCD from tIRA account #1 (take amount equal to the RMD for account #1)
2) Next, take RMDs from tIRA accounts #2 and #3
3) Next take a Roth conversion from tIRA account #2

I plan to wait until Nov 2018 to decide whether to take my initial RMDs in 2018, or delay until Jan - April 2019 (due to possible capital gain event in 2018).

Question #1:
I understand that delaying the RMDs would restrict me from taking a Roth conversion in 2018, but would I still be able to take the QCD in 2018
Yes, but it will still count toward your 2018 RMD and reduce the amount of the 2018 RMD that you delay until 2019. You will have to wait until you turn 70 1/2 though

Question #2:
If I take a standard deduction (I have always itemized, but rules are changing), can I use QCD in lieu of itemizing a charitable donation?
Not positive what you're asking, buy the QCD effectively never shows up in the taxable column on your return but doesn't decrease income (other than cancelling out the 1099R distribution for it)

RetiredCSProf
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Re: How do QCDs relate to RMDs?

Post by RetiredCSProf » Sun Dec 03, 2017 7:05 pm

OK, thanks, I think I get it. For example, suppose my total RMD from my tIRA accounts is $20K and suppose that I want to donate $5K to charities.

If I distribute $20K in RMDs and then donate $5K to charities from taxable accounts, my adjusted gross income (AGI) is increased by $20K. If my itemized deductions are less than my standard deduction, then I cannot deduct the $5K donation; that is, the donation does not change my taxable income or my tentative minimum tax (for determining Alternative Minimum Tax).

OTOH, If I donate $5K in QCDs and then distribute $15K in RMDs, I have satisfied my RMD, and my AGI is increased by $15K instead of by $20K, which effectively reduces my taxable income, regardless of whether I itemize or take a standard deduction.

Advantages to taking QCD over a donation from a taxable account:
- I may not have enough itemized deductions to get a tax break from the donation
- Medicare premiums (IRMAA) are based on AGI (actually on MAGI), not on taxable income
- FAFSA (student aid applications) are based on AGI
- others?

Lynette
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Re: How do QCDs relate to RMDs?

Post by Lynette » Sun Dec 03, 2017 7:24 pm

RetiredCSProf wrote:
Sun Dec 03, 2017 7:05 pm
OK, thanks, I think I get it. For example, suppose my total RMD from my tIRA accounts is $20K and suppose that I want to donate $5K to charities.

If I distribute $20K in RMDs and then donate $5K to charities from taxable accounts, my adjusted gross income (AGI) is increased by $20K. If my itemized deductions are less than my standard deduction, then I cannot deduct the $5K donation; that is, the donation does not change my taxable income or my tentative minimum tax (for determining Alternative Minimum Tax).

OTOH, If I donate $5K in QCDs and then distribute $15K in RMDs, I have satisfied my RMD, and my AGI is increased by $15K instead of by $20K, which effectively reduces my taxable income, regardless of whether I itemize or take a standard deduction.

Advantages to taking QCD over a donation from a taxable account:
- I may not have enough itemized deductions to get a tax break from the donation
- Medicare premiums (IRMAA) are based on AGI (actually on MAGI), not on taxable income
- FAFSA (student aid applications) are based on AGI
- others?
This is my understanding of how it works and I started the process to do a rollover of part of my 401K to Fidelity so I can do a QCD.

Some time ago, I ran tax calculations to see if I would be better off doing charitable contributions (I itemize) or a QCD. It was a wash. But what has changed for me is that I have retired, have pensions and take RMDS. I have been notified that I have to make significant IRMAA payments. So anything I can do to reduce my MAGI is meaningful. If I do a QCD, I will likely not itemize - of course dependent on the new tax laws.

Disadvantage - more paperwork and hassle.

Uniballer
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Re: How do QCDs relate to RMDs?

Post by Uniballer » Sun Dec 03, 2017 9:14 pm

RetiredCSProf wrote:
Sun Dec 03, 2017 7:05 pm
Advantages to taking QCD over a donation from a taxable account:
- I may not have enough itemized deductions to get a tax break from the donation
- Medicare premiums (IRMAA) are based on AGI (actually on MAGI), not on taxable income
- FAFSA (student aid applications) are based on AGI
- others?
Yeah. The government is essentially subsidizing your donation by the amount of income tax that you will not be paying on the money drawn from your IRA.

clydewolf
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Re: How do QCDs relate to RMDs?

Post by clydewolf » Mon Dec 04, 2017 4:16 pm

The QCD may also lower the taxable part of your SS benefit.

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House Blend
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Re: How do QCDs relate to RMDs?

Post by House Blend » Mon Dec 04, 2017 5:28 pm

...and if you live in a state with income tax and cannot itemize charitable donations at the state level, a QCD effectively makes your donation state-deductible.

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