Post-RMD Age Contributions and Qualified Charitable Distributions
By Benjamin Maas, CISP, CIP, CHSP
We have a 75-year-old IRA owner who is still working and wants to make a regular current-year contribution of $7,000 to his Traditional IRA at our financial organization. He says he has eligible compensation of $15,000. In addition, his RMD for 2021 is $8,452.73. Is he able to offset his RMD by the amount of his regular contribution?
No. While he’s eligible to make the regular contribution after age 70½ (because of the Setting Every Community Up for Retirement Enhancement Act changes), he still must take his full required minimum distribution (RMD) amount by December 31, 2021, to avoid the 50 percent excess accumulation penalty tax.
If this IRA owner takes a full tax deduction on the $7,000 regular contribution, does he still need to take his RMD for 2021?
Yes. Even if he is eligible for a tax deduction on his $7,000 regular contribution, he still must take his $8,452.73 RMD for 2021. The contribution and distribution remain separate transactions and must be independently reported by your financial organization to the IRS.
We have a Traditional IRA owner who turned age 70½ in 2021 and wants to take a qualified charitable distribution from her Traditional IRA. Is she still allowed to do that at age 70½, or has the age changed to 72 like the age to start taking RMDs?
She is allowed to take a qualified charitable distribution (QCD) because the eligibility age for QCDs remains at 70½. But the amount of a QCD she can exclude from taxable income will be reduced if she chooses to make deductible Traditional IRA contributions for the year she attains age 70½ or later years.
Is there a formula to help figure out the reduced QCD tax exclusion amount?
Yes, but the formula is only used if an IRA owner makes one or more post-70½ deductible IRA contributions. The QCD income exclusion formula is A – (B – C).*
A = the amount of the QCD for a year (up to $100,000) prior to any reduction under this formula
B = the aggregate deductible IRA contributions made for all tax years beginning with the account owner’s 70½ year
C = prior year income exclusion reductions made as a result of the Setting Every Community Up for Retirement Enhancement Act.
*cannot be less than $0
Example
Meredith has a $500,000 balance in her IRAs. She deducted a total of $21,000 in Traditional IRA contributions from ages 70½–73, and she has never taken a QCD. Meredith now wants to withdraw $45,000 from her Traditional IRA, made payable to her favorite charity, and claim an income tax exclusion. Using the formula, as shown below, Meredith can exclude $24,000 of that $45,000 withdrawal from income as a QCD.
QCD income exclusion = A – (B – C)
QCD excluded from income = $45,000 – ($21,000 - $0) = $24,000
While you may want to be familiar with these concepts, this is a tax matter. IRA owners must work with their tax preparers to determine how much of their QCD they can exclude from income on their IRS Form 1040, U.S. Individual Income Tax Return.
