ISSUE
Savvy institutions are taking advantage of “IRA Charitable Rollovers.” Your donors over 70 ½ years old may give through their IRA accounts using all or part of their annual required minimum distribution – potentially killing two birds with one stone. With that in mind, it makes sense to familiarize ourselves with IRAs, QCDs, RMDs – ASAP!
SITUATION
Idaho Theological Seminary (ITS) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii). They are not required to file Form 990 annually.
ITS’s new CFO, Cheryl, calls us to ask about “IRA Charitable Rollovers.”
“We’ve heard you talk at conferences about how donors who are over 70 ½ can give up to $100,000 per year directly from an IRA to a charity like ITS. They may receive tax benefits such as not including the distribution in income and possibly having their charitable contribution limited, especially with the new tax law. We think we have a good handle on that. However, we’ve heard you talk about donors ‘dedicating’ their RMDs to a charity. What’s that about? And, how do RMDs work?”
“Well, the IRA Charitable Rollover from I.R.C. Section 408(d)(8) does not have to be $100,000, it can be less. Also, in IRS-speak it is a ‘qualified charitable distribution’ or QCD. ‘Many of your over-70 ½ donors will be required to take a ‘required minimum distribution’ or RMD from an Individual Retirement Account annually. For several reasons, it generally makes sense to take the RMD before December 31. Even though in the first year after turning 70 ½ they would have an April 1st distribution deadline, that could be made by December 31 of the year they turn 70 ½. If you do not take any distributions by the deadlines, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. So, as your over-70 ½ donors are talking with their advisors about their 2019 RMDs – maybe now – it would be good to ask them if they’d be inclined to consider distributing that RMD directly from their IRA account to Idaho Theological Seminary.”
“Great. Now, how to the RMD calculations work?”
“Good question. The person over 70 ½ years old with an IRA generally would take their “base amount” – which is the balance in their IRA at 12/31 of the immediately preceding calendar year divided by a distribution period from the IRS’s ‘Uniform Lifetime Table.’ You can find out more by taking a look at IRS Publication 590-B, , “Distributions from Individual Retirement Accounts (IRAs)” for more information.” It can be found at:
https://www.irs.gov/pub/irs-pdf/p590b.pdf
“Cool. Thanks.”
RULES
From IRS webpage “Retirement Topics – Required Minimum Distributions (RMDs)”:
You cannot keep retirement funds in your account indefinitely. You generally have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.
Your required minimum distribution is the minimum amount you must withdraw from your account each year.
- You can withdraw more than the minimum required amount.
- Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.”
For each subsequent year after your required beginning date, you must withdraw your RMD by December 31.
The first year following the year you reach age 70½ you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½), and an additional withdrawal by December 31 (for the year following the year you turn 70½). To avoid having both of these amounts included in your income for the same year, you can make your first withdrawal by December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.
From IRS webpage “IRS reminds retirees of April 1 deadline to take required retirement plan distributions”:
Most taxpayers use Table III (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2017 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B.
IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.
BOTTOM LINE
- “IRA Charitable Rollovers” or Qualified Charitable Distributions can be a great source of funding for your institution.
- Because of tax-timing issues, this is the time of year when donors over 70 ½ years old may be calculating their annual RMD – might they be inclined to distribute all or part of that amount to your institution?
- Do you maintain a list of donors and/or potential donors who are over 70 ½ years old?
- Check out IRS Publication 590-B for more information.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.
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