Q.: Thank you for your excellent article on Qualified Charitable Distribution (QCD). I have a question on QCD that you may be able to answer. If my RMD is $150,000 and I also elect to make QCD of $20,000, I plan to withdraw $180,000 from my IRA. My understanding is anything I withdraw from an IRA that is over the RMD amount can be put into a Roth IRA. If this is correct, how much can I deposit into my Roth IRA, $30,000 or $50,000?
A.: Thanks, PL. Glad you enjoyed the article.
I assume no after-tax contributions were made along the way so all funds in the IRA are pre-tax. I am also assuming that the $180,000 you reference is the amount of taxable income you want to show up on your tax return. If both those are true, you can convert $50,000.
Beginning in the year one turns 72 and becomes subject to Required Minimum Distributions (RMD), the first dollars out of an IRA are deemed to be part of that RMD regardless of whether the money goes to you or a qualified charity. Here is what you do:
Have your IRA custodian or trustee (the entity holding your IRA) send a $130,000 check made payable to you or transferred to an account owned by you. It does not have to be one check. You can take the $130,000 in any increments you want. What matters is the total paid out during the year and where those funds go.
For the Qualified Charitable Distribution (QCD), have the IRA custodian send a $20,000 check payable to your qualified charity. This too does not need to be one check or even one charity. Multiple checks to multiple charities totaling $20,000 will suffice to hit your QCD target. Just make sure the checks are payable to the charities and that the organizations are qualified public charities as described in IRC Section 170(b)(1)(A). Private foundations and donor advised funds do not qualify but most well-known charities do.
It does not matter if the QCD is done before, after or at the same time you get your $130,000. The RMD is satisfied either way because $130,000 to you + $20,000 for QCD = the $150,000 RMD. However only the $130,000 you received will be taxable.
After the RMD is satisfied, converting $50,000 to a Roth IRA will put another $50,000 of taxable income on your return. $130,000 to you + $50,000 conversion = your $180,000 taxable income goal.
As I said above, what matters is the total paid out during the year and where those funds go. Here’s how that comes to fruition. You will receive a 1099-R with $200,000 of distributions on it. That comes from the $130,000 sent to you, the $20,000 QCD, and the $50,000 converted. The $200,000 goes on line 4a “IRA distributions” but only $180,000 goes on line 4b “taxable amount” of your return. Don’t forget to tell your tax preparer about the QCD. The 1099-R does NOT track QCDs.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.