QCD-dedicated IRA

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
BayouBoy
Posts: 20
Joined: Wed Nov 21, 2018 2:33 pm

QCD-dedicated IRA

Post by BayouBoy »

I have a traditional IRA with Fidelity, in which I keep a balance of less than five dollars. In the past, this TIRA proved useful as a pass-through account for money I moved from my 403(b) to a ROTH: 20% mandatory tax withholding 403(b) to ROTH directly, but a rollover out of 403(b) to TIRA is not a taxable event, and no withholding was imposed to then go Fidelity TIRA to Fidelity ROTH.

Now I see that funds can be moved from 403(b) to charities quite advantageously through a TIRA. Again, the rollover out of 403(b) to TIRA is not a taxable event. The Qualified Charitable Distributions that follow from the TIRA are tax-free and go toward covering the TIRA’s Required Minimum Distribution. Adjust the TIRA balance such that the RMD matches your planned QCD.

Do people set up TIRAs as dedicated QCD generators? How should one invest the balance of a TIRA dedicated to charitable giving through QCD? I think Fidelity has a charitable giving service/division but I’m diy right now.
JayB
Posts: 330
Joined: Sat May 28, 2022 9:57 am

Re: QCD-dedicated IRA

Post by JayB »

BayouBoy wrote: Mon Nov 21, 2022 8:56 pm I have a traditional IRA with Fidelity, in which I keep a balance of less than five dollars. In the past, this TIRA proved useful as a pass-through account for money I moved from my 403(b) to a ROTH: 20% mandatory tax withholding 403(b) to ROTH directly, but a rollover out of 403(b) to TIRA is not a taxable event, and no withholding was imposed to then go Fidelity TIRA to Fidelity ROTH.

Now I see that funds can be moved from 403(b) to charities quite advantageously through a TIRA. Again, the rollover out of 403(b) to TIRA is not a taxable event. The Qualified Charitable Distributions that follow from the TIRA are tax-free and go toward covering the TIRA’s Required Minimum Distribution. Adjust the TIRA balance such that the RMD matches your planned QCD.

Do people set up TIRAs as dedicated QCD generators? How should one invest the balance of a TIRA dedicated to charitable giving through QCD? I think Fidelity has a charitable giving service/division but I’m diy right now.
I have pondered a similar strategy. I have an empty tIRA at Fidelity that's been used in the past as a vehicle for holding transferred assets between 403(b) accounts and my Roth IRA. When I'm required to take RMDs in a few years, I was thinking of shifting enough 403(b) assets into the tIRA to effectively create an endowment by laddering zero coupon Treasury bonds (STRIPS) so that they mature over the next 20 years or so and annually donating each maturing rung as a QCD. With the STRIPS, I can plan the size of each rung to be sure it would at least cover the RMD for that year when it matures.
User avatar
David Jay
Posts: 13170
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: QCD-dedicated IRA

Post by David Jay »

I see that you are still holding a 403(b) even though you are approaching RMD age. Are you aware that a QCD taken from an IRA cannot satisfy your 403(b) RMD? Your 403(b) RMD must come directly from your 403(b).

Perhaps it is time to convert the entire 403(b) balance to a traditional IRA in order to use your QCDs to meet your RMD obligations?
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
chemocean
Posts: 1007
Joined: Mon Dec 19, 2016 9:45 pm

Re: QCD-dedicated IRA

Post by chemocean »

BayouBoy wrote: Mon Nov 21, 2022 8:56 pm I have a traditional IRA with Fidelity, in which I keep a balance of less than five dollars. In the past, this TIRA proved useful as a pass-through account for money I moved from my 403(b) to a ROTH: 20% mandatory tax withholding 403(b) to ROTH directly, but a rollover out of 403(b) to TIRA is not a taxable event, and no withholding was imposed to then go Fidelity TIRA to Fidelity ROTH.

Now I see that funds can be moved from 403(b) to charities quite advantageously through a TIRA. Again, the rollover out of 403(b) to TIRA is not a taxable event. The Qualified Charitable Distributions that follow from the TIRA are tax-free and go toward covering the TIRA’s Required Minimum Distribution. Adjust the TIRA balance such that the RMD matches your planned QCD.

Do people set up TIRAs as dedicated QCD generators? How should one invest the balance of a TIRA dedicated to charitable giving through QCD? I think Fidelity has a charitable giving service/division but I’m diy right now.
I plan to make partial transfers from my 401K to my traditional IRA each December such that my traditional IRA balance generates a RMD the following year that is equal or greater to my projected charitable contributions to be made as QCDs. I haven't modeled the transfers yet, but I image that some years I might not have to transfer any funds because of the market fluctuation and the increasing denominator in the calculation with increasing age.
Alan S.
Posts: 11529
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: QCD-dedicated IRA

Post by Alan S. »

Yes, suppose you want to keep the majority of your funds in a qualified plan because you live in one of the few states that provides poor creditor protection for IRAs, but you also want to do QCDs.

This is problematic because RMDs start out close to 4% of your account balance. For example, if you want to do 10k of QCDs, you need a prior year end IRA balance of around 250k to generate an RMD of 10,000. You would then apply your entire IRA RMD to QCDs and accordingly would have no taxable IRA distribution income. Whatever additional balance you have left could be left in the employer plan.

To expand on this example, if you have 1mm in your 401k or 403b, and you want to do 10k of QCDs, your employer plan would have to allow a partial rollover of 250k to your IRA late in the year prior to the start of RMDs. You would then distribute 10k from the IRA as a QCD early the following year to reduce the time there were creditor exposed funds in your IRA. The IRA might have a balance for less than a month every year. The other 750k would remain with ERISA creditor protection in the employer plan and you would have to take a 30k taxable RMD from that employer plan.
Topic Author
BayouBoy
Posts: 20
Joined: Wed Nov 21, 2018 2:33 pm

Re: QCD-dedicated IRA

Post by BayouBoy »

Excellent points and thanks. I’ve decided to QCD (if that is a verb) $700 next year. $700 X 23.8 (my 2023 RMD withdrawal factor) = $16,660. I should now move enough money from the 403(b) to establish this as the tIRA year-end balance. Tax-free QCDs totaling $700 will be made January 2023, and this will satisfy the tIRA RMD. But what to do with the tIRA residual balance of $16,600 - $700? It can't be returned to the 403(b) I don't believe.

The idea of establishing a QCD-dedicated bond or CD ladder within the tIRA is interesting but might take a lot of planning. QCDs must be paid out of tIRA cash, as far as I know, so maintaining a cash reserve would be prudent in case the laddered investments don't generate enough cash to cover the RMD/QCD. Future RMDs, as a percentage of IRA balance, have been established well into the future, although they could change.

Right now I'm thinking of letting the tIRA residual balance ride in a 52-week tBill, and then repeat the RMD/QCD in 2024. As Chemocean suggests: "make partial transfers from my 401K to my traditional IRA each December such that my traditional IRA balance generates a RMD the following year that is equal or greater to my projected charitable contributions to be made as QCDs."
Silk McCue
Posts: 7503
Joined: Thu Feb 25, 2016 7:11 pm

Re: QCD-dedicated IRA

Post by Silk McCue »

Alan S. wrote: Mon Nov 21, 2022 11:16 pm Yes, suppose you want to keep the majority of your funds in a qualified plan because you live in one of the few states that provides poor creditor protection for IRAs, but you also want to do QCDs.

This is problematic because RMDs start out close to 4% of your account balance. For example, if you want to do 10k of QCDs, you need a prior year end IRA balance of around 250k to generate an RMD of 10,000. You would then apply your entire IRA RMD to QCDs and accordingly would have no taxable IRA distribution income. Whatever additional balance you have left could be left in the employer plan.

To expand on this example, if you have 1mm in your 401k or 403b, and you want to do 10k of QCDs, your employer plan would have to allow a partial rollover of 250k to your IRA late in the year prior to the start of RMDs. You would then distribute 10k from the IRA as a QCD early the following year to reduce the time there were creditor exposed funds in your IRA. The IRA might have a balance for less than a month every year. The other 750k would remain with ERISA creditor protection in the employer plan and you would have to take a 30k taxable RMD from that employer plan.
Since QCDs can be performed without respect to RMDs starting at 70.5; and since they are not limited to the amount of the RMD but rather $100k per year regardless of the size of the RMD; it seems to me that a transfer could be made at anytime from the 401k and then paid out immediately as a QCD; or possibly that it would have to be transferred in one calendar year to establish a prior year end of year balance for some IRS technical reason that I am not aware of and paid out in the following year.

What is your assessment of this?

Cheers
User avatar
22twain
Posts: 3430
Joined: Thu May 10, 2012 5:42 pm

Re: QCD-dedicated IRA

Post by 22twain »

Alan S. wrote: Mon Nov 21, 2022 11:16 pm Yes, suppose you want to keep the majority of your funds in a qualified plan because you live in one of the few states that provides poor creditor protection for IRAs, but you also want to do QCDs.

This is problematic because RMDs start out close to 4% of your account balance. For example, if you want to do 10k of QCDs, you need a prior year end IRA balance of around 250k to generate an RMD of 10,000. You would then apply your entire IRA RMD to QCDs and accordingly would have no taxable IRA distribution income. Whatever additional balance you have left could be left in the employer plan.
Why not simply roll over $10K to the IRA?

If you currently have an empty IRA (and no others), then roll over $10K to it before the end of the year, the RMD for next year will probably be a few hundred dollars. What prevents you from using the entire $10K for QCDs, satisfying the small RMD "along the way"? IRS publication 590-B simply says "The maximum annual exclusion for QCDs is $100,000." I haven't found anything restricting QCDs to the RMD amount.

403(b)s have a separate RMD, but the 403(b) balance will be reduced by the amount of the rollover, so its RMD next year will be correspondingly lower.
It's "IRMAA" (Income Related Monthly Adjustment Amount), not "IIRMA" or "IRRMA" or "IRMMA".
SuzBanyan
Posts: 1404
Joined: Thu Jun 02, 2016 11:20 am

Re: QCD-dedicated IRA

Post by SuzBanyan »

22twain wrote: Tue Nov 22, 2022 7:55 am
Alan S. wrote: Mon Nov 21, 2022 11:16 pm Yes, suppose you want to keep the majority of your funds in a qualified plan because you live in one of the few states that provides poor creditor protection for IRAs, but you also want to do QCDs.

This is problematic because RMDs start out close to 4% of your account balance. For example, if you want to do 10k of QCDs, you need a prior year end IRA balance of around 250k to generate an RMD of 10,000. You would then apply your entire IRA RMD to QCDs and accordingly would have no taxable IRA distribution income. Whatever additional balance you have left could be left in the employer plan.
Why not simply roll over $10K to the IRA?

If you currently have an empty IRA (and no others), then roll over $10K to it before the end of the year, the RMD for next year will probably be a few hundred dollars. What prevents you from using the entire $10K for QCDs, satisfying the small RMD "along the way"? IRS publication 590-B simply says "The maximum annual exclusion for QCDs is $100,000." I haven't found anything restricting QCDs to the RMD amount.

403(b)s have a separate RMD, but the 403(b) balance will be reduced by the amount of the rollover, so its RMD next year will be correspondingly lower.
You absolutely can make a QCD that is larger than your RMD. But it is obviously less helpful from a tax perspective.
With $1M the employer plan and a transfer of only $10k to the IRA, the RMD from the employer plan would be about $40k, all taxable income. The RMD from the IRA would be about $400, but $10k would be used as a QCD. So total income from distributions = $40k. Had the OP moved $250k to the IRA as in Alan S.’s example, the taxable income from employer plan/IRA distributions would only be $30k.
User avatar
22twain
Posts: 3430
Joined: Thu May 10, 2012 5:42 pm

Re: QCD-dedicated IRA

Post by 22twain »

Ah, OK. Either way, you pay no tax on the distribution from the IRA, but with the larger rollover, you pay less tax on the RMD from the 403(b). I didn't think about the effect on the origin of the rollover.
It's "IRMAA" (Income Related Monthly Adjustment Amount), not "IIRMA" or "IRRMA" or "IRMMA".
User avatar
celia
Posts: 15354
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: QCD-dedicated IRA

Post by celia »

BayouBoy wrote: Mon Nov 21, 2022 8:56 pm I have a traditional IRA with Fidelity, in which I keep a balance of less than five dollars. In the past, this TIRA proved useful as a pass-through account for money I moved from my 403(b) to a ROTH: 20% mandatory tax withholding 403(b) to ROTH directly, but a rollover out of 403(b) to TIRA is not a taxable event, and no withholding was imposed to then go Fidelity TIRA to Fidelity ROTH.
Moving assets from a 403(b) to a Roth IRA or converting from a TIRA to a Roth IRA will have the same tax effect (assuming the same amount is withdrawn from the 403(b) and the TIRA). The only difference is that in the 403(b), you are withdrawing extra from tax-deferred to pay the taxes just as if you had put the extra withholding previously into Taxable, then paid the taxes out of that.

But paying taxes from Taxable for the Roth conversion draws down your non-retirement account (which may cause a gain or loss if you have to sell something).

Here’s an example for someone in the 25% tax bracket (total fed and state) who wants to convert $4.000 to Roth. When you withdraw from the 403(b), to withdraw enough to pay the taxes and have $4,000 for the Roth, you would have to withdraw $5,333 and withhold 1,333 (25%) for taxes. To convert $4,000 from the TIRA, you would need to pay $1,000 for taxes from somewhere. If you pay from Taxable, you would be using dollars that were already taxed. So besides the $1000, that money was taxed previously at $333. (You had to earn 1,333 and pay $333 (25%) in taxes in order to be left with $1,000 today so you can pay the taxes on the Roth conversion.)

Bringing QCDs into the picture is something different. The only reason you “save” on taxes is that you are giving money to charity. Instead of moving it to another account of yours. (I assume you know the rules for taking a QCD.)


Did you notice the reminder above? Even if you do Roth conversions or QCDs, you still need to take an RMD from the 403(b) every year (before transferring money to the TIRA) and put it in a Taxable account. The QCD can only satisfy the TIRA RMD, not the 403(b) RMD.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
BayouBoy
Posts: 20
Joined: Wed Nov 21, 2018 2:33 pm

Re: QCD-dedicated IRA

Post by BayouBoy »

Thanks again all, and Celia especially for the tax analysis. If I understand correctly, the only difference in funding a ROTH from a 403(b) versus from a tIRA is where I want the tax payment to come from - a decision that might be based on a number of factors, such as which asset do I want to sacrifice.

I'm aware of the QCD and other rules, thanks for mentioning some of them:

Nothing says that QCDs have to match the IRA's RMD, but I would find it convenient if the QCD annual total did match or exceeded the RMD, thus avoiding an additional withdrawal transaction. If the IRA is dedicated to charity giving, then the RMD could be considered an annual gifting minimum. Considering the $100,000 annual QCD maximum, one can move substantial, untaxed monies to nonprofits through QCDs, irrespective of RMDs.

Anyone who's taking RMDs should know that those required withdrawals can be shared only among like accounts. RMDs owed by 403(b)s can't be satisfied by withdrawals from IRAs, nor vice-versa. On the other hand, the RMDs owed by each of perhaps many tIRAs can be combined, even if held at different institutions. Do I have that right?

Yes, sequence of withdrawals and rollovers is important. You're not allowed to rollover 403(b) to tIRA until the 403(b) RMD has been satisfied. I assume that the same rule applies to 401(k) accounts? I recently satisfied an RMD with a bank transfer, followed a week later by the rollover to a tIRA. A reason to complete the RMD early in the year?
User avatar
David Jay
Posts: 13170
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: QCD-dedicated IRA

Post by David Jay »

BayouBoy wrote: Tue Nov 22, 2022 4:39 pmOn the other hand, the RMDs owed by each of perhaps many tIRAs can be combined, even if held at different institutions. Do I have that right?
Yes.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
BayouBoy
Posts: 20
Joined: Wed Nov 21, 2018 2:33 pm

Re: QCD-dedicated IRA

Post by BayouBoy »

Thank you.
VanGar+Goyle
Posts: 375
Joined: Sat May 29, 2021 1:31 pm

Re: QCD-dedicated IRA

Post by VanGar+Goyle »

BayouBoy wrote: Mon Nov 21, 2022 8:56 pm Do people set up TIRAs as dedicated QCD generators? How should one invest the balance of a TIRA dedicated to charitable giving through QCD? I think Fidelity has a charitable giving service/division but I’m diy right now.
I assume that the Fidelity charitable giving service is their DAF Donor Advised Fund division.
A QCD is different from a DAF. Contributions using both can reduce taxable income, but a QCD can also reduce Adjusted Gross Income.
You can also not use a QCD from an IRA to contribute directly to a DAF.
Post Reply