IRA owners who are eligible to make QCDs but are still making deductible contributions to an IRA will need to be cautious. The SECURE Act eliminated the 70½ age restriction for making deductible contributions to an IRA. Starting January 1, 2020, anyone with earned income, regardless of age, can contribute to a traditional IRA. However, IRA account owners must now reduce their intended QCDs by any deducted contribution amounts made into their IRAs after age 70½. Example: Loretta is 73 and has continued to work part time. Since the SECURE Act eliminated the age restriction on Traditional IRA contributions, she decides to make a deductible contribution of $7,000 to her IRA. Loretta is also a charitable person and in the same year as her contribution, she does a QCD for $10,000. The IRS views this as double-dipping. Loretta cannot combine both the $7,000 deductible contribution and the $10,000 tax-free QCD. Her otherwise tax-free QCD is reduced by the contribution amount, essentially causing $7,000 of her $10,000 QCD to be taxable. In addition to the SECURE Act’s complex formula, every post 70½ deductible IRA contribution is counted by the IRS. These annual post 70½ contributions are recorded and the aggregate follows the IRA owner, which therefore cancels the tax benefits of a future QCD. There are alternative tax strategies for individuals 70½ or better that are still contributing to an IRA and wish to make charitable contributions but avoid the anti- abuse rules outlined above. For example: • Rather than a QCD, taxpayers can donate highly appreciated assets from a taxable account. By doing so, the taxpayer avoids a capital gain recognition. • Taxpayers could contribute to a Roth IRA instead of a Traditional IRA, since only contributions to Traditional IRAs conflict with the QCD rules outlined above. • Instead of deducting a Traditional IRA contribution, taxpayers can deliberately make non-deductible contributions to a Traditional IRA, which would avoid the conflict with QCD rules.
For additional questions we recommend you make an appointment with your tax advisor. As always feel free call the Hills Bank’s Wealth Management team at (319) 338-1522.
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1st Quarter 2021
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