Inherited IRAs and QCDs

[steelyman]

I received an update from Ed Slott’s website today. One thing that caught my eye was a statement that IRA beneficiaries may use them:

Quote:

QCDs are not limited to IRA owners. If you are an IRA beneficiary, you may also do a QCD. All the same rules apply, including the requirement that you must be age 70½ or older at the time the QCD is done.

https://www.irahelp.com/slottreport/...y-surprise-you

[jebmke]

Yes; good way to dump income between 70.5 and 72 for those with inherited IRAs who have not started RMD in their own yet.

[steelyman]

I’ve still got a way to go to get to 70.5 but have followed threads about DAFs (donor advised funds) to see if they might fit in here.

[jebmke]

Quote:

Originally Posted by steelyman I’ve still got a way to go to get to 70.5 but have followed threads about DAFs (donor advised funds) to see if they might fit in here.

Unfortunately, a QCD may not be donated to a Donor Advised Fund (or a private foundation).

[steelyman]

Quote:

Originally Posted by jebmke Unfortunately, a QCD may not be donated to a Donor Advised Fund (or a private foundation).

Ah. Thanks!

(see, that’s why one posts to e-r.org… )

[OldShooter]

Quote:

Originally Posted by jebmke Yes; good way to dump income between 70.5 and 72 for those with inherited IRAs who have not started RMD in their own yet.

Not sure what you mean. QCDs and RMDs are totally different animals. They have sometimes been a little confused because the starting age for both used to be the same. We are in RMD territory and use QCDs for all charitables, even public radio memberships. Schwab provides QCD check blanks, so making the donations is really easy.

[jebmke]

Quote:

Originally Posted by OldShooter Not sure what you mean. QCDs and RMDs are totally different animals. They have sometimes been a little confused because the starting age for both used to be the same. We are in RMD territory and use QCDs for all charitables, even public radio memberships. Schwab provides QCD check blanks, so making the donations is really easy.

yes; but the financial case for QCDs absent the RMD is not compelling for most people. Absent the RMD, the easiest way to keep the distribution off your 1040 is to not make the distribution.

[OldShooter]

Quote:

Originally Posted by jebmke yes; but the financial case for QCDs absent the RMD is not compelling for most people. Absent the RMD, the easiest way to keep the distribution off your 1040 is to not make the distribution.

Well, YMMV, I guess. A taxpayer drawing from tIRAs who has deductions near the standard deduction can reduce his income via QCD instead of via a charitable deduction and then make a "profit" by taking the standard deduction. That's what we do; our charitables typically total about half the standard deduction, so by using QCDs we can take the full standard deduction even though our actual deductions are only about half that amount. This has nothing to do with RMDs though it does reflect the fact that our non-pension, non-SS income all comes from tIRAs.

[jebmke]

Quote:

Originally Posted by OldShooter Well, YMMV, I guess. A taxpayer drawing from tIRAs who has deductions near the standard deduction can reduce his income via QCD instead of via a charitable deduction and then make a "profit" by taking the standard deduction. That's what we do; our charitables typically total about half the standard deduction, so by using QCDs we can take the full standard deduction even though our actual deductions are only about half that amount. This has nothing to do with RMDs though it does reflect the fact that our non-pension, non-SS income all comes from tIRAs.

Just draw less. For some (note I said for many it isn't compelling, not all) there is a case but in general, the easiest way to avoid the income is to not recognize it. A lot depends on whether other funds are available for charity. Right now I'm funding all charity out of our donor advised fund which was funded years ago. As a result, we take the standard deduction. Starting next year when SS starts I may do something drastic like start to give away taxable again to drive our tax rate down to near zero. I have to do the math first -- it isn't always simple and I can usually find something more fun to do.

One advantage of QCDs (RMD or not) is that it is a workaround of the 60% rule for charity.

[Souschef]

All these strategies are well and good until you get to a time when you have both SS and RMD's. Other than using QCD's there is no way to dodge the tax bullet.

[jebmke]

Quote:

Originally Posted by Souschef All these strategies are well and good until you get to a time when you have both SS and RMD's. Other than using QCD's there is no way to dodge the tax bullet.

Sure there is. If you have a large enough taxable account you can donate from that and deduct it. You might miss a little if your normal deductible expenses are less than the standard but in the scheme of things, that can be averaged over several years by bunching a lot of deductions into one year (the easiest way to do this is through a Donor Advised Fund). One advantage of donating from taxable is you can use appreciated securities and bury the gain permanently. Of course, the other way to bury the gain is to die but that doesn't seem like an optimal strategy.

[Souschef]

I am sorry, but I do not agree. My marginal tax rate between State and Federal is almost 30%. If I donate from a taxable account, I am only saving 15% max on the gain. If I do a QCD, I save 30% on the tax for the entire amount and lower my IRA balance for the next RMD.

In my case, there is no way I could come up with deductions nearing the standard deduction.
YMMV

[RetireBy90]

Quote:

Originally Posted by Souschef I am sorry, but I do not agree. My marginal tax rate between State and Federal is almost 30%. If I donate from a taxable account, I am only saving 15% max on the gain. If I do a QCD, I save 30% on the tax for the entire amount and lower my IRA balance for the next RMD. In my case, there is no way I could come up with deductions nearing the standard deduction. YMMV

I agree that you save more by doing a QCD and you can add in savings in other taxes like IRMAA. I'm planning on doing a QCD each year once we reach RMDs and dedicate any remaining TIRA to charity after we pass.

That additional IRMAA is not a large figure but you have to double for a couple.

[jebmke]

Quote:

Originally Posted by Souschef I am sorry, but I do not agree. My marginal tax rate between State and Federal is almost 30%. If I donate from a taxable account, I am only saving 15% max on the gain. If I do a QCD, I save 30% on the tax for the entire amount and lower my IRA balance for the next RMD. In my case, there is no way I could come up with deductions nearing the standard deduction. YMMV

yes; it is very case specific. Once we decided to bequest our estate to charity I realized that the best strategy may be to blow as much out before we croak as we can and beef up the deduction to the point where the ~$18K dead (pardon the pun) zone isn't that much as a percentage of the pie. I'm not sure but I think I can get our tax rate down to low single digits. As I said, I still have to refine the numbers. SS starts next year and RMDs in '25.

[Montecfo]

Quote:

Originally Posted by Souschef I am sorry, but I do not agree. My marginal tax rate between State and Federal is almost 30%. If I donate from a taxable account, I am only saving 15% max on the gain. If I do a QCD, I save 30% on the tax for the entire amount and lower my IRA balance for the next RMD. In my case, there is no way I could come up with deductions nearing the standard deduction. YMMV

My thoughts exactly. I would love to have access to QCD now, as it is the most efficient way to make charitable contributions. I of course transfer LTCG shares from my taxable account in kind (either direct or via my DAF), but I have other ways to cheaply monetize gains there. Not so with traditional IRA.

[Hershey102]

Quote:

Originally Posted by steelyman I received an update from Ed Slott’s website today. One thing that caught my eye was a statement that IRA beneficiaries may use them: https://www.irahelp.com/slottreport/...y-surprise-you

Thank you for sharing. DW begins her RMD next year but inherited an IRA last month. The deceased had not taken her required RMD for 2022 so the obligation becomes ours. While we had intended to do a QCD for DW next year it had not occurred to me that we could do a QCD this year on the inherited IRA and it’s required distribution by EOY.

[gauss]

Quote:

Originally Posted by jebmke Sure there is. If you have a large enough taxable account you can donate from that and deduct it. You might miss a little if your normal deductible expenses are less than the standard but in the scheme of things, that can be averaged over several years by bunching a lot of deductions into one year (the easiest way to do this is through a Donor Advised Fund). One advantage of donating from taxable is you can use appreciated securities and bury the gain permanently. Of course, the other way to bury the gain is to die but that doesn't seem like an optimal strategy.

QCD's have an advantage beyond anything to do with RMDs.

You can donate money that has never been taxed WITHOUT having to file Schedule A and itemizing deductions. With the current tax laws in effect, many can no longer itemize deductions with the large standard deduction (and lack of personal exemptions) that are in effect through 2025.

Of course donating after-tax appreciated securities is another tactic, but realize that you did pay tax already on the principal of the donations and that does not come back to you.

If the goal is to draw down pre-tax retirment accounts and donate efficiently to charity I don't think there is much that can beat a QCD.

I wish that one could make QCDs prior to 70.5.

-gauss

[OldShooter]

Quote:

Originally Posted by Hershey102 Thank you for sharing. DW begins her RMD next year but inherited an IRA last month. The deceased had not taken her required RMD for 2022 so the obligation becomes ours. While we had intended to do a QCD for DW next year it had not occurred to me that we could do a QCD this year on the inherited IRA and it’s required distribution by EOY.

All good stuff, but really the tIRA and the RMD have nothing to do with the QCD option. No tIRA, no RMD, if you meet the age criterion you can still QCD to your hearts content (up to $100K).

[oldtimer]

Quote:

Originally Posted by OldShooter All good stuff, but really the tIRA and the RMD have nothing to do with the QCD option. No tIRA, no RMD, if you meet the age criterion you can still QCD to your hearts content (up to $100K).

Aren't QCDs only available from a traditional or inherited traditional IRAs?

[OldShooter]

Quote:

Originally Posted by oldtimer Aren't QCDs only available from a traditional or inherited traditional IRAs?

Sorry. Yes.