Tax Free Transfer from IRA to Qualified Charity

[KevinMc]

I hope I'm on the right message board here.  I had a client ask me about taking his RMD and directing it straight to a charity tax free (and still have it count as his RMD).  I have a couple questions on this topic and any input would be appreciated:

• Can the RMD be taken from a Profit Sharing Plan or 401-k or must it come from an IRA?
• If the answer is just IRA than can the client accomplish this by rolling funds from the Profit Sharing to an IRA and then directing it to the charity tax free?
• Does it have to be an RMD or can any distribution directed straight to a charity receive the favorable tax treatment?
• Obviously if the transaction is tax free (and still counts as RMD) then the funds going to the charity aren't eligible to be deducted since they are already tax free?
• Does it have to be the whole RMD or can you direct a portion to a charity tax free and take the balance as a taxable distribution?

Any clarity on the matter would be greatly appreciated.  Thanks!

[C. B. Zeller]

What you are talking about is called a Qualified Charitable Distribution (QCD). The IRS has a webpage about QCDs (https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity) and you'll be able to find more information by googling that term.

8 minutes ago, KevinMc said:

• Can the RMD be taken from a Profit Sharing Plan or 401-k or must it come from an IRA?

Both IRAs and qualified plans are subject to the RMD rules. All IRAs owned by the same individual are lumped together for purposes of RMDs, however qualified plans must each separately satisfy the RMD rules. In other words, if you have 2 IRAs and 2 qualified plans, you can take one distribution from either IRA to satisfy the RMD for both IRAs, but you must take a separate distribution from each qualified plan. Only a distribution from an IRA can be a QCD.

10 minutes ago, KevinMc said:

• If the answer is just IRA than can the client accomplish this by rolling funds from the Profit Sharing to an IRA and then directing it to the charity tax free?

Maybe. Clearly your client is over age 73 if they are looking at their RMDs. Are they retired from the employer who sponsors the qualified plan? Or are they a 5% owner of the employer? If either of those are yes, then they are required to take an RMD from the qualified plan this year, and that would have to be taken before they could roll over any additional amount to the IRA. You would also need to check that particular plan's rules to see if the distribution would be allowed; there could be restrictions on what they can do if they are still working or if they want to take less than the entire account.

13 minutes ago, KevinMc said:

• Does it have to be an RMD or can any distribution directed straight to a charity receive the favorable tax treatment?
• Does it have to be the whole RMD or can you direct a portion to a charity tax free and take the balance as a taxable distribution?

The QCD can be any amount up to $100,000 per year.

15 minutes ago, KevinMc said:

• Obviously if the transaction is tax free (and still counts as RMD) then the funds going to the charity aren't eligible to be deducted since they are already tax free?

Correct.

[Peter Gulia]

A year’s qualified charitable distributions, in the right circumstances up to $105,000 [2024], from non-Roth IRAs (but not a § 408(k) or § 408(p)) do not count in the IRA owner’s income for Federal income tax.

Regrettably, a “QCD” can be available with an IRA, but not from an employment-based retirement plan.

Some § 401(a)-(k), § 403(b), and governmental § 457(b) participants who prefer to stay in those plans make yearly rollovers into the IRA, in amounts one estimates as enough for the next year’s-worth of charitable donations. (Usually, an employment-based plan’s participant may claim a distribution because an opportunity for qualified charitable distributions does not begin until one’s age 70½.)

The amounts of the QCDs need not relate to any minimum-distribution amount.

Also, some users of QCDs—even a 90-something—have no minimum-distribution requirement, neither from an employment-based retirement plan nor, practically, from one’s IRAs.

For details and other information, see Internal Revenue Code § 408(d)(8):

https://uscode.house.gov/view.xhtml?req=(title:26%20section:408%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section408)&f=treesort&edition=prelim&num=0&jumpTo=true

This is not advice to anyone.