IRS Guidance on Reducing a Person’s QCD if Deductible Contributions Are Made
Additional IRS Guidance Is Needed
Section 107 of the SECURE Act repealed the maximum age rule for traditional IRA contributions. An individual over age 70 1/2 with qualifying compensation is now eligible to make a traditional IRA contribution. However, this new law also coordinates a person’s QCDs with their deductible IRA contributions. For tax years commencing after December 31, 2019, a person who makes a deductible contribution is required to reduce their QCD amount by the amount of their deductible contributions. Some IRA owners used to excluding 100% of the distribution as a QCD will no longer be eligible to do so if they choose to make a deductible contribution.
The coordination of QCDs and claimed tax deductions is not just for one year. Aggregation over multiple years is required. A person’s otherwise non-taxable QCD amount is reduced (but not below zero) by an amount equal to the excess of the aggregate of a person’s deductions for all tax years ending on or after the person attains age 70 1/2 over the aggregate of prior year reductions in their QCDs.
In Notice 2020-68 the IRS furnished the following illustration as modified by CWF. Example. An individual who attained age 70 1/2 before 2020, makes a deductible contribution of $5,000 for 2020 and also for 2021. She made no QCD for 2020, but she made a QCD of $6,000 for 2021 and a QCD of $6,500 for 2022.
For 2020 she claims a deduction for $5000 for her traditional IRA contribution. She claims no QCD for 2020 because she made no QCD.
For 2021 she also claims a deduction of $5,000 for her traditional IRA contribution. She is unable to claim a QCD for her gift of $6,000 because she has claimed deductions of $10,000 (aggregate 2020 and 2021) and this amount exceeds her QCD gift amount of $6,000.
For 2022 she does not claim a deduction because she has made no traditional IRA contribution. However, she has made a QCD $6,500. Because her aggregated gifts of $12,500 exceed her claimed deductions of $10,000, she is able to exclude $2,500 of her QCD of $6,500.
Presumably, if a person no longer is eligible to exclude a certain amount of their QCD from their income, then that same amount may not be used to satisfy their RMD for that year. The IRS discussion does not illustrate how a person’s RMD is impacted by this new coordination rule. In Q&A 42 of Notice 2007-7 the IRS had expanded the tax benefit of making a QCD. Not only was the person able to exclude the QCD from income, but it could be taken into account when determining if a person has satisfied his or her RMD. The IRS will need to provide further guidance. At this point we understand she would have to withdraw her full RMD amount for 2020 and 2021. For 2022, the $2,500 which she is eligible to exclude from income, she may use this to satisfy or partially satisfy her 2022 RMD.
In summary, an individual over age 70 1/2 may now make a deductible traditional IRA annual contribution, but some (maybe many) individuals may decide because of this coordination rule and the effect it has on their annual RMD that they will not make a deductible contribution.