Charitable Donation of RMD

[ldr]

Hi to All,

BACKGROUND:

I have a very difficult client who is already perturbed with me because we can't process her RMD for free, we can't give it to her in quarterly installments, and we can't endorse a rollover of all her assets into her IRA and THEN taking her RMD.  All of my research indicates that she must take the RMD first and then roll the remainder from the 401(k) to the IRA.

She is terminating her plan effective 05/31/2019; her date of birth is 08/26/1948; she turned 70.5 on 02/26/2019.

QUESTION:  Her RMD is a bit over $31,000.  She has called several times insisting that when it is processed, her broker will send $10,000  straight to the United Way, tax free, and the remainder which is of course taxable, will go to her.  Now that I go to actually research and try to accommodate her wishes, I am finding that this is not permissible.  According to my research, she could have done this out of an IRA, but not out of a 401(k).  Do any of you know any way that she can somehow avoid taxation on the portion she wants to donate to charity?  Can she recoup it somehow when her 2019 personal taxes get prepared next spring?

Thank you for any observations or advice.

[Lou S.]

Process the RMD. Process the rollover. Tell her to discuss tax implications with her accountant. Unless you are also her accountant, in which case, good luck.

 

[ldr]

Lou S., you rock.  My sentiments exactly and oh thank goodness no, I am not her accountant.

[Janie Kaminski]

Same. One of the greatest challenges is working with folks who toe the operational bounds of plan administration. We can make recommendations and outline consequences, but they are ultimately responsible for their decisions and bear the risk of contrary outcomes. Good luck!

[ldr]

Janie, thanks for your comments.  That's pretty much the discussion we had with her about transferring all of her assets to her IRA before taking her RMD.  "Look, you can do it and we can't stop you, but here are the potential consequences if you are ever audited."  She backed down and chose to take the RMD first rather than take the risk.  Of course then she started trying to figure out how to get creative and avoid taxation on at least part of it.  She called me insisting that she "knew" that it could pass tax-free to a charity, and since I had never had the question come up before, I didn't know.

Reading up on it yesterday, I figured out that it doesn't work like that in a 401(k) plan, and I was just hoping there was some creative solution since she's already so angry about not getting her way on all the other aspects of this distribution.

We try so hard to please our clients, but sometimes there just isn't any other answer besides 'No, you can't do that!"

[JustnERPA]

Actually there is a solution: just have her contact her representatives and senators and tell them to make Congress change the law!  I'm sure they will listen intently.

[Janie Kaminski]

The thought of passing off tax-free dollars to a non-profit (and expecting to take a deduction). That's definitely not how it works. I've had to discuss that a time or two. I get why folks don't want the tax burden, but there's a reason why RMD rules are in effect.

I've told my clients I will always look out for their best interest, and that they must also understand they might not always like what I have to say. It's just part of being a good service provider :-)

[Bird]

If she itemizes deductions, getting the RMD and then writing a check for $10,000 to the charity will likely have the same net effect as giving it to the charity directly.  (I think there might also be possible AMT issues.)  Not knowing the answer to that question means you are wasting your time.

[jpod]

Wait a minute:  First, she wanted to receive her MRD, but in quarterly installments.  Now she wants to give it all to charity.  Something doesn't compute here. 

[Lou S.]

For what it's worth I agree with your research. Just tell your client  you are experts in retirement plan law and IRC section 401(a)(9) requires the plan to process her RMD for 2019 before any rollover. Failure of the Plan to do so could result in Plan Disqualification which would put her whole rollover in jeopardy. Which it sounds like you already did.

After that, tell her you are not experts in personal taxation and she should consult with qualified CPA or similar professional on matters of personal taxation and deductibility of charitable contributions. But that your understanding is that charitable contribution such as the one she is describing have to be from an IRA to get the treatment she wants and are not allowed directly from Qualified retirement plans. The charitable contribution as she describes is likely no different than any $10K check she writes to charity.

Or as JstnERPA says, tell her to talk to her congress critters.

 

[ESOP Guy]

5 hours ago, ldr said:

 I was just hoping there was some creative solution since she's already so angry about not getting her way on all the other aspects of this distribution.

Well if creative is what you wanted here you go!

Just find Marty McFly and take her back in time so she can terminate her plan before she turns 70.5.  She puts all the money in an IRA and she is free to do what she wants!

Too creative maybe?? 

[QDROphile]

A most requests for creative solutions amount to wanting to be told that the illegal proposition is acceptable.

[ldr]

You are all just too funny!  I am under the general impression that we are dealing with a very spoiled individual who is used to getting her way and does not do well with following instructions or being told "No".  I cannot speak to why she first insisted on quarterly installments and now wants to give part of it away.   Sometimes I get the idea that she demands something unusual just for the fun of watching people jump through hoops.

ESOP Guy, I'd like to hear more about Marty McFly.  Not for her - for me!  Can he take me back to the 70's and let me choose something other than the pension profession?  :)  (Just kidding, maybe)

[ESOP Guy]

1 hour ago, ldr said:

ESOP Guy, I'd like to hear more about Marty McFly.  Not for her - for me!  Can he take me back to the 70's and let me choose something other than the pension profession?  :)  (Just kidding, maybe)

I can't decide if I made too obscure pop culture reference or not but Marty McFly is the main character in the Back to the Future movies.   If by chance you haven't seen them you need to binge watch all 3.  

[ldr]

ESOP Guy, I am so glad you brought this up!  I bought those movies as a gift for a grandkid a while back and he already had them.  I kept them and meant to watch them myself and forgot all about it.  I will hunt them up and make a point to watch them this time.  :)

[jashendorf]

If it helps (though it sounds like it probably won't), you could explain to her that as of 1/1 the 2019 RMD amount from the 401(k) plan isn't an "eligible rollover distribution", so even if you were to do that as an "accommodation", it would be an excess contribution to the IRA, and would cost her $$$. If you put it in terms of money out of her pocket, maybe she'd appreciate it (since she seems so set on the charitable contribution idea.

[ACK]

Here is a quick article from Kiplinger that you might refer to her that addresses her questions:

https://www.kiplinger.com/article/retirement/T062-C001-S003-charitable-donations-from-retirement-accounts.html

[ldr]

Thanks to all who replied.  As of Friday afternoon she seems to have simmered down and is willing to simply take the full RMD without any further complications.  ACK, I did send her that particular article plus another one from U.S. News & World Report that is along the same lines.