Can a transfer from 401k to a charity be tax free?
Can a transfer be made from a 401k to a charity be considered tax free?
I read a Kiplinger’s article that stated that funds could be transferred from a 401k to and IRA, and then the transfer from the IRA to the charity could be tax free, but the article also stated that a transfer from 401k to the charity directly would not be a tax free event. I don’t hang my hat on Kiplinger’s.
My client is 71 yrs old, and still employed with a significant amount in her 401k and she wants to transfer funds to charity without kicking herself into a higher tax bracket.
Any help?
Thanks,
William
Permalink Submitted by David Mertz on Wed, 2019-08-14 17:34
Qualified Charitable Distributions that are excluded from income are only permitted from IRAs, not from a 401(k). To make a QCD using funds originating from the 401(k) the client would need to roll funds from the 401(k) over to an IRA then make the QCD from the IRA. If the client remains working for the employer with 401(k) for the remainder of the year, there is no concern about needing to complete an RMD from the 401(k) before doing the rollover to the IRA. However, if at year end the client is not working for the employer with the 401(k), the RMD for the 401(k) (which is not eligible for rollover) must be satisfied before rolling additional distributions from the 401(k) over to and IRA that year. The result is that there is no way to cause an RMD from a 401(k) to be a QCD.
Permalink Submitted by Alan - IRA critic on Wed, 2019-08-14 17:42
The article is correct. A QCD can only be done from an IRA account. Perhaps the 401k will allow a partial direct rollover of the amount desired for the QCD to an IRA. A QCD could then be made to offset part of all of the IRA RMD if client already has an IRA. If client does not have an IRA, then there is no IRA RMD for the direct rollover year and the IRA would have too small a balance to generate much of an RMD for the following year either. However, a QCD can still be done whether any RMD is offset or not and still be more tax efficient than writing a personal check to a charity, even if the person is itemizing. Therefore, client might still want to investigate a partial rollover to an IRA and then do a QCD from the IRA that will not be included in AGI.