Make sure you avoid these errors if you're thinking about doing a QCD.
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Correct Timing of the QCD
Beware of Deductible Traditional IRA Contributions
A traditional IRA contribution can either be deductible (and reported on the traditional IRA owner’s federal income tax return as an Adjustment to Income), or as nondeductible made with after-taxed dollars (and reported as nondeductible on the traditional IRA owner’s federal income tax return on IRS Form 8606).
A deductible traditional IRA contribution in the same year a QCD is made can invalidate the QCD tax benefit. The following example illustrates:
Elizabeth, age 74, made a deductible traditional IRA contribution of $7,500 in June 2023. She also made a $10,000 QCD during 2023. Of the $10,000 QCD, only $2,500 of the QCD would be excluded from Elizabeth’s income. The remaining $7,500 would be a taxable QCD, eliminating the tax benefit.
Taking an IRA deduction in the same year as doing a QCD was not an issue until the passage of the SECURE Act in 2019. One of the provisions of the SECURE Act is to allow individuals over age 70.5 with earned income to contribute to a traditional IRA. Prior to the SECURE Act passage, individuals over age 70.5 could not contribute to a traditional IRA, even if an individual had earned income. But with the passage of the SECUIRE Act, effective January 1, 2020, the age limit for making traditional IRA contributions was removed. This means that an individual aged 70.5 and older with earned income (salary, wages or net self-employment income, or married to someone with such income) can make a deductible traditional IRA contribution and make a QCD in the same year, thus losing the tax benefit associated with the QCD.
A solution to this problem of making deductible traditional IRA contributions in the same year making a QCD is for the individual to contribute to a Roth IRA. Roth IRA contributions are never deductible. If an individual is not eligible to contribute to a Roth IRA because their adjusted gross income is too large, the individual should use the “back door” Roth IRA conversion/contribution process in which a nondeductible traditional IRA contribution is made and then converted to a Roth IRA. Individuals who are interested in using a “back door” Roth IRA contribution are advised to check with their tax advisor to make sure that the Roth IRA conversion/contribution process is performed correctly.
QCDs Made Via “Checkbook” IRAs
QCDs that are made for calendar year 2023 must be completed by December 31, 2023. The traditional IRA funds must leave the traditional IRA and be sent to the charity before December 31, 2023.
If a traditional IRA uses a “checkbook” traditional IRA to issue a QCD for 2023, then those checks must be received by the qualified charity and cleared by December 31, 2023. If the checks are not cashed by the qualified charity by close of business December 31, the checks will not show up as a distribution for 2023 for tax reporting purposes. Note that December 31,2023 is a Sunday; therefore, traditional IRA owners should make sure their traditional IRA checks are received by the qualified charity no later than Thursday, December 28, 2023.
Traditional IRA Beneficiary QCDs
Traditional IRA beneficiaries who are age 70.5 and older can also make QCDs. The fact that the original traditional IRA owner was over age 70.5 has no impact on this requirement. If a traditional IRA beneficiary attempts a QCD before reaching age 70.5, the QCD will not qualify and will not be excluded from income. Even for qualifying beneficiaries (those over age 70.5), the QCD ordering rules will also apply. In particular, if the IRA beneficiary is subject to beneficiary IRA RMD, then the beneficiary should make a QCD before taking the beneficiary RMD. Otherwise, the QCD will not offset the RMD income.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.