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Tuesday July 23, 2024

Case of the Week

Gifts from IRAs, Part 1

Case:

Quentin was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best efforts in school, finding a rewarding job and increasing his savings. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could to maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to invest in his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Given his lifetime savings, investment income and Social Security distributions, Quentin does not feel as though he needs the additional income that the IRA distributions will provide - especially with the increased taxes tied to that income.

Question:

Quentin has made numerous charitable donations throughout the years and has enjoyed the benefit of the income tax deduction from those donations. On his 70th birthday, Quentin decides that he should have a conversation with his CPA. He recalls hearing something about using his IRA to make charitable gifts at age 70. Before taking action, however, Quentin decides to call his tax advisor and asks him if this is the best course of action. Is there a better way for Quentin to accomplish his goals?

Solution:

Quentin's tax advisor confirms that, with the change in the tax law from the SECURE Acts, Quentin is not yet required to take distributions from his IRA.

By April of the year following the owner of a traditional IRA reaching age 73, the IRA owner will need to take an RMD from his or her IRA. All subsequent RMDs must be taken each year by December 31. The RMD is calculated by dividing the balance of the IRA at the end of the previous calendar year by the life expectancy factor of the owner. The product is the RMD amount that must be taken by December 31. This RMD amount is taxable as ordinary income to the IRA owner.

Quentin could withdraw from his IRA at age 70 and make a gift of those funds to charity. He would be taxed on the distribution but would also receive a charitable income tax deduction. Based on his retirement income, Quentin lives comfortably but his advisor explained he is no longer itemizing his deductions on his tax return. Quentin's advisor also noted that although the SECURE 2.0 Act changed the age at which RMD must be taken, the rules for qualified charitable distributions (QCD) have not changed. After 70½, Quentin could make a tax-free distribution of up to $100,000 per year directly to charity. Distributions prior to 70½, however, would be treated as taxable income. Quentin decides to delay his contribution for another few months, until he is age 70½, to be eligible to make a qualified charitable distribution (QCD).

Published April 14, 2023
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