ira and charity; withholding rmd

Submitted by Maria Difalco on Mon, 2011-03-14 01:35

FIRST: 70 and 1/2 year-olds contributing moneys to a charity that will not be included in income OR as a contribution on schedule A: I have conflicting information-one insurer states that distribution sent to me, in my name, I make another check out to charity, and I then forward it to charity–which to me says this totally negates what the law is meant to do( 3 phone calls, same answer). The 2nd insurer tells me they make check out to charity, send it to me, and I send to charity. I was under the impression from my readings that the check should be made out to the charity andd directly sent to them by the insurer.

SECOND: When I did my rmd in November, 2010, I requested a rather hefty withholding (over 5 K). Since then several situations have changed and I am now in a position to use the 2011 and 2012 option for declaring income rather than 100% in 2010. I am concerned that the IRS will question the amount of monies I will be requesting as a refund. My 1040 is pretty straight and simple.

Thanks, Maria



Submitted by Alan Spross on Mon, 2011-03-14 02:00

1) Insurer 2 is correct. The check must be made out to the charity, and it can be sent directly or sent to you for delivery. The check should NOT be made out to you. That said, the 1099R you receive will be the same AS IF the check had been made out to you.There is no special coding for these 1099R forms and you must report the QCD on your 1040 in a way that is similar to reporting a rollover.

2) Unless you took your RMD before the QCD, the QCD could be applied against your RMD. With respect to the RMD that you did apparently take in November, it must always be reported in the year taken, ie 2010. You are confusing that with the 2010 conversions to Roth IRAs and only these conversions can have the income deferred for two years. Your RMD income cannot be deferred. Your 2010 return should show the withholding you had taken from your RMD and you will get credit for it against your actual tax bill.

Perhaps your question 1 is aimed at making a 2011 QCD. If so, you can cover your 2011 RMD by the 2011 QCD. Do not take your RMD before the QCD or you cannot use the QCD to cover the RMD.



Submitted by Maria Difalco on Wed, 2011-03-16 13:53

Alan: sorry, I didn’t make it clear that I did both a rmd withdrawal and a conversion in 2010, thus the hefty tax withholding. I know each has to be designated on 1040. Since several situations expected in 2011 did not/will not transpire I am now in a position to do the 2 year allocation of the converted monies. My concern is if the large refund will be a red flag to irs since everything is legit. Should I attach an explanation letter or just let it ride?

Another question—–I was planning todo the QCD to cover my rmd. However I was only thinking of using 50% of the amount for charity and showing the other 50% as income. The information I’ve been reading is not very clear as to whether this is possible. Is it? or must all be designated for charities to be considered QCD?

3rd–does each conversion reset the 5 year withdrawal requirement for tax free earnings? or is this determined by year roth started (1993)?

Thanks



Submitted by Alan Spross on Wed, 2011-03-16 22:18

I wouldn’t worry about the large refund. The IRS will see that a conversion was done with the income deferred two years. You could also not request a refund and leave it with the IRS to be applied to your 2011 taxes where the half the conversion income must be included. No need for a special explanation.

The QCD is just the amount you want to transfer directly to the charity. You must do this before any other distribution if you want the QCD to cover your RMD. But if you need to take a distribution anyway, you cannot avoid the tax on the portion that you take out for yourself. You must get the order correct if you are doing QCDs and Roth conversions.

1) The conversion must be done AFTER the RMD is taken
2) That means if you want the RMD to be covered by the QCD, you must do the QCD first, as that will take care of the RMD before you convert.

Note: If your QCD is smaller than your RMD, do the QCD first, then take the rest of the RMD out for yourself and then do the conversion. If you need more funds later in the year, that is OK, just take another distribution from the IRA when you need it. You will be taxed on everything except for the QCD portion which includes the amount of your RMD that is covered by the QCD.

3) For Roth IRA qualification, meaning that the entire Roth including earnings are tax free, the 5 year holding period starts with the year you made your first Roth contribution of any type, either regular or conversion. You must also be 59.5 as well as meeting the holding period. But the first possible Roth IRA year was 1998, not 1993. Note that if you are not yet 59.5, you must hold each conversion for 5 years to avoid a 10% penalty if you must withdraw those conversions before 5 years. This relates only to the penalty on those conversions since you have already paid the income tax.



Submitted by Maria Difalco on Tue, 2011-04-12 14:00

I*’m reviewing your comments again prior to acting—I’m still confused by ‘taking qcd’s first’ comment. Does that mean that 2 seperate requests must be filed with the company at two different times? or will IRS allow one withdrawal request with specific instructions as to how checks are to be addressed –i.e. 4 different checks made out to 4 specific charities and fifth check with balance to me?

Also, some friends plan to make large donations but they feel the outcome would be the same to include all as rmd income and then just deduct on schedule a. If this is true, then why even bother with qcd’s? What am I missing here?

Thanks for your help.

M



Submitted by Alan Spross on Tue, 2011-04-12 18:46

The “QCD first” issue refers to the fact that if you want the QCD to cover your RMD, you must make the QCD first. If you take the RMD first, then the RMD is completed and the QCD will not cover any part of it. Therefore, the RMD would be taxable instead of tax free as part of the QCD. If your QCDs total less than the RMD, you could take the part of the RMD that will in excess of the QCD first, but I would avoid doing that. Make the QCDs first, and if they are not enough to cover the full RMD, then take the remainder of the RMD afterwards. There should be no problem if you want checks for different charities to be issued at the same time in a blanket instuction to the IRA custodian. Just for safety’s sake, I would wait until the QCDs are done before requesting the balance to be paid to you.

It would be highly unlikely that taking the RMD and then itemizing the charitable deductions would produce as good as result as the QCD. All the following would have to occur:
1) Must be able to itemize in total
2) Must be under the annual % limits on various types of charitable deductions
3) SS must be fully taxable either way since AGI for SS taxes will be higher if the IRA distribution is taxable. If SS already not included at 85%, the taxable RMD would increase the amount of SS included in income
4) Higher AGI will cut back on medical deductions subject to 7.5% AGI limit and misc deductions subject to 2% limit
5) Possibility of other tax credits to be affected, such as education credits
6) QCD applies to pre tax balance first leaving basis for other distributions, so it increases remaining basis in the IRA allowing basis to be used faster than under the pro rate rules for distributions to the taxpayer. So this is costly to the extent that the IRA has basis from non deductible contributions.
7) Some of these also may apply to state income taxes
8) Not sure about any AMT affects, but that is also possible

So if any of these people come through all the above unscathed, they would be a real exception.



Submitted by Maria Difalco on Mon, 2011-04-18 11:12

You are a gem!! thanks, M



Submitted by Maria Difalco on Tue, 2011-05-10 17:53

Alan: Here we go again/RMD and QCD.
(1) IRA set up with a withdrawal benefit rider. This IS NOT annuitization.
(2) Withdrawal will be 2k-3k more than aggregate RMD for 2011.
(3) Will IRS allow withdrawal to cover full RMD or just from this specifc insurer? not only in 2011 but in future years also.
(4) My plan was to use these monies for my QCD.
(5) With one annual payment, I’m not sure how I can do QCD’s first, before RMD, as you’ve previously stated.
(6) If the dates of the checks made out to the QCD recipients precede the date of the check made out to me for the balance—would this satisfy IRS rules? I’m not even sure the insurer would do this.
(7) I’m not sure if more frequent payments will be allowed–awaiting insurer’s reply.

It is so frustrating that something which seems so cut and dry has us jumping through all these hoops.

Thanks, M



Submitted by Alan Spross on Tue, 2011-05-10 18:43

M,
Since the QCD will be larger than your RMD and you do not need additional distributions for the year, properly making the QCD will eliminate the taxes on your total IRA distributions for the year. You must have the QCD check issued before any other distributions, but it does not matter when in the year you take care of it. But make sure the insurance company system can handle making out the QCD check to the charity, otherwise you will have to change the planning around.

After the QCD is issued that will fully cover your RMD for all your TIRA accounts, if you need more funds distributed later in the year, the additional distributions will be taxable. Of course, they would not apply to either the QCD or the RMD, just additional distributions that will be taxable.

The future of the QCD is up in the air after this year. If not extended by Congress, 2011 is the last year.

Re 3) QCD will cover the RMD or all your IRAs unless it is less than the total RMD amounts. You indicated it is more.
4) No problem there
5) The annual payment must be made out to the qualified charity. It does not matter when in the year you take the distribution as long as it is your first distribution for the year. That check QCD check will INCLUDE your total RMD.
6) Here is where I am confused. If your entire distribution is to be a QCD, there is no balance. It all goes to the charity, but is more than your RMD. You can do a QCD for any amount up to 100,000 and it may be more or less than your RMD. If it was less, then it just means that the difference is the rest of the RMD and will be taxable. Your case is simpler since it is MORE THAN your RMD.
7) Since you want the entire distribution to be a QCD, it really does not matter how the payments are distributed, but it is simpler to just take one full annual payment. But if there is some reason that you had to take these in multiple payments, it does not cause a problem with your QCD or RMD. The downside it you have to handle several checks instead of just one.

If dealing with the insurance company is too much of a hassle and they do not understand QCDs, an option is to have the distribution transferred directly to your other IRA, and then take the QCDs from that account. That would have to be a direct transfer, you cannot do an indirect rollover without triggering a taxable event.



Submitted by Maria Difalco on Thu, 2011-05-12 16:14

Allan: Thanks. After reading my questions aloud, your responses are A-OK, as usual.. However I realized I needed to be more specific so you would better understand my dilemma as to process to comply with IRS.

Annual withdrawal will be about $11K. My aggregate RMD is about $8600. I’m planning on my QCD to be $6500. The balance of “$4K” to me. With only one withdrawal allowed, how do I take my QCD first?

If the QCD checks are dated earlier than the balance check to me, but all mailed to me at the same time—would that suffice?

I apologize for the extra time you need to respond. I’m still waiting for the insurer to respond re: changing from only an annual withdrawal.

Thanks for sharing all your knowledge with me.

M



Submitted by Alan Spross on Thu, 2011-05-12 21:30

It’s OK if all the checks are dated the same day. Just make sure the QCD check is not dated later than any other distribution.

In summary, you will have a check made out to the qualified charity ( no donor advised funds allowable) for 6,500, and one made out to you for 4,500. The RMD is covered in the process since it is less than 11,000.

Your Form 1040 line 15 would show:
15a 11,000
15b 4,500 Enter “QCD” next to 15b. (4,500 is the taxable amount) (the 6,500 difference is the tax free QCD).

If you have any basis in the IRA, you will also need an 8606 and line 15b will be somewhat less than 4,500.
All things considered, perhaps the process would be less prone to error if you just took the single distribution for the year, but of course two checks.



Submitted by Maria Difalco on Tue, 2011-05-17 01:00

Alan: Thank you, again. By basis I am assuming you mean non-deductible contributions. I do not have any, so 8606 will not be required. Correct?

M.



Submitted by Alan Spross on Tue, 2011-05-17 01:20

Correct.



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