QCD after the SECURE Act


We’ve been reviewing the changes that the SECURE Act (Setting Every Community Up for Retirement Enhancement) has brought about. We’ve covered RMDs (just the regular kind), student loans, and contributions. Now we’ll talk about QCD – Qualified Charitable Distributions. We’ll also cover the new anti-abuse rule as well.

The original rules for QCD are that if you are over age 70½ years old (subject to RMDs under the pre-SECURE rules), you can make a direct distribution to a charitable organization from your IRA. (Only IRAs are allowed to make QCD distributions – h/t to reader Ritch!) By qualifying this direct distribution as a QCD, you do not have to include the amount of the distribution as income on your tax return. (For more on tax treatment and why this is a big deal, see this article about QCDs.)

After the SECURE Act passed, QCD now has a few differences.

First of all, even though SECURE changed the RMD age to 72, you are still allowed to make QCD distributions beginning when you reach 70½. That’s a slight departure from the old rule, which indicated that you had to be subject to RMD before you could make a QCD. Now you can make a QCD at any age after 70½, even though you may not be subject to RMD until age 72.

The other difference is more important, however: Since SECURE also made a change to the contribution rules, by allowing contributions to be made at any age (previously not allowed after 70½), there’s an anomaly that the rules address. This new rule is called the QCD anti-abuse rule, and it does exactly what you’d think, given the name.

If there wasn’t an anti-abuse rule in place, you could make a contribution to your IRA (if you have earnings) and then immediately withdraw it as a QCD. This would result in you taking a double-dip of tax preferences for that particular money.

For example, let’s say you’re single, 71 years old, and you have total income (before any dealings with your IRA) of $50,000. You make a regular, deductible contribution of $7,000 to your IRA, bringing your adjusted gross income down to $43,000. You then also direct the IRA custodian to distribute $7,000 to your favorite charity as a QCD. Since QCD distributions aren’t included as income, your adjusted gross income remains at $43,000.

But since you made a deductible contribution and a QCD, you’re getting twice the tax benefit from this activity. Enter the QCD anti-abuse rule.

With the QCD anti-abuse rule, when you make a QCD distribution, you must include in income any post-age-70½ deducted contributions to your IRA. Once the amount of your post-age-70½ deducted contributions is met with attempted QCDs, you will be eligible to have any excess amount treated as QCD, not included in taxable income.

Back to our example, let’s say at 71 you’re making the deductible contribution to your IRA, and you made a similar deductible contribution to your IRA in the previous year, when you had reached 70½. So you’ve made total deductible contributions to the IRA in the amount of $14,000.

Now you decide to make a QCD to your favorite charity, in the amount of $20,000. You are only allowed to bypass your tax return with $6,000 of the QCD distribution, since you had $14,000 of deducted IRA contributions after age 70½. So your income for that year, although you originally reduced it by $7,000 for the deductible IRA contribution, is now increased by $14,000 due to the disallowed portion of your QCD. The remaining $6,000 is still allowed as a QCD.

You can still itemize that $14,000 contribution to charity. Since (for 2020) the standard deduction for someone in your position (single and over age 65) is $13,700, you will get the full benefit of that itemized deduction, along with your other itemized deductions.

In order for this to work properly, if you’ve made deductible contributions after age 70½, you still need to attempt to make the QCD as if you had not made deductible contributions after age 70½. That is, ask your custodian to send the funds directly to the qualified charity, just the same for any QCD. Otherwise, if you bypass the QCD process and take a distribution in your own name, followed by a contribution to the charity, you won’t be able to eliminate that amount from your previously-deducted amounts.

From our prior example, if you had made $14,000 of deductible contributions to your IRA after age 70½ and later wanted to make a $5,000 contribution from your charity, you might think it’s fruitless to follow the QCD process since that amount is going to be considered a regular distribution (and therefore taxable) anyway. But if you don’t follow the QCD rules and attempt to make this $5,000 distribution a QCD, then you’ll still have a $14,000 balance in your deductions that will continue to work against your future potential QCDs. However, if you pass this $5,000 distribution through the QCD process, you’ll reduce your future deductible contribution figure for the anti-abuse rules to $9,000. Eventually, if you continue the QCD process in future years you’ll eliminate the deductible contributions balance and be able to make a successful QCD.

Just keep in mind that the post-age-70½ deducted contributions to IRAs will follow you for the rest of your life, or at least until you’ve made enough attempted QCD distributions to use up your deducted contributions from earlier. Say you waited until you were 80 years old to make a QCD – you’ll need to go back and add up all of your deducted IRA contributions from 70½ onward to this year, and subtract those deducted contributions before the QCD will be allowed the special tax treatment.

It may work out better in the long run if you were to make those IRA contributions as non-deductible, depending on your circumstances. You’ll want to run the numbers and maybe talk to your tax professional to decide which direction makes most sense for you.


Originally posted at https://financialducksinarow.com/13575/qcd-after-the-secure-act/

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