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QCDs from Inherited IRA?

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Last Post by Stuart Matthews 5 years ago

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Bob Nevins

(@nevinsalumni-duke-edu)

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Topic starter February 4, 2022 2:57 pm

Hi! Pretty new Pralanian here reading through the manual and thinking ahead to QCDs when I turn 70.5. (Gold 2022). on p. 109 it says "RMD’s from an inherited IRA cannot be used to fund QCD’s.".

But that's not an IRS restriction is it? According to Fidelity one can do QCDs from inherited IRAs. Do we just not do that in PRC, or is my understanding flawed? Thanks!!

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Stuart Matthews

(@smatthews51)

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February 4, 2022 5:55 pm

Bob,

You're right about this; this is an error in the manual and will be corrected immediately. Thanks for pointing it out!!

Stuart

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Bob Nevins

(@nevinsalumni-duke-edu)

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Topic starter February 4, 2022 7:22 pm

Thanks!! Does PRC actually let me do QCDs from the inherited IRA then? How would I model that?

And if my wife and I each have Trad IRAs, what's the best way to model using both for QCDs? Do them from mine first and see when they run out, and then do a subsequent set from hers?

The more I dig into this calculator and read the book (RTFM LOL), the more I like it! Thank you for all your work.

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(@nc-cpl)

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February 5, 2022 9:47 am

@nevinsalumni-duke-edu Hey Bob - Regarding the TIRA's for QCD's, I set up ours similar to what you're considering, where we start our QCD's, using my TIRA first, at my age 71 (I'm 9 yrs older than spouse), then start with hers when she turns 71. I use refer to Tabular view > Expenses to see if the amounts I've designated each year all qualify as QCD or there's non-qualified "spillover." Adjust as needed. Our goal is to use almost all of our TIRA's for charities and to offset RMD taxes. Mine will be virtually depleted by age 80, hers will take longer, and retain a small portion of funds as "insurance" in case needed for long term care.

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Bob Nevins

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Topic starter February 5, 2022 4:09 pm

Thanks @nc-cpl. I played with multiple scenarios for the first time today - used a baseline with vanilla donations, then enabled QCDs from my TD in S2, and compared with Roth conversions. The QCDs and Conversions come out pretty much the same and are better than the baseline.

But fascinatingly, if I just do QCDs from my TD until it runs out, but then don't do QCDs from wife's TD (i.e., do plain old charity after my TD runs out), the result is a fair amount better than if I do QCDs from mine followed by QCDs from hers. That seems nonintuitive at the least.

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(@nc-cpl)

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February 7, 2022 9:52 am

@nevinsalumni-duke-edu Did you determine what's happening with your QCD approach? I'm also curious to know if there is any way (in Tabular view) to determine ones "QCD max threshold," whereupon the amount you specify in Charities, ceases to cancel out any more taxes (so if lowering taxes in retirement is a goal, you know where to set your QCD upper limit each year?

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(@nc-cpl)

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February 7, 2022 3:18 pm

My main goal is to hone in on the optimal QCD amounts for each of us, but don't want to create another issue in the process. We were hoping to use the majority of our TIRA's for charitable contributions, and we'd like to have the bulk of both given away as we near end of life, but it's finding the right annual amount that's tricky. I'm wondering if upping our QCD's amounts until the RMD's are mostly wiped out (as shown in TAB>Withdrawals view) is an overly-simplistic strategy that's ignoring any other important variables. Any thoughts?

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Bob Nevins

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Topic starter February 7, 2022 3:54 pm

Well, I discovered my previous results were erroneous because I hadn't specified the same cash ceiling/floor in S2 and S3. When I did that, my scenarios (Contributions from taxable accounts, contributions via my QCD, contributions from taxable + Roth conversions) all deliver basically the same results. So I need to figure out whether there are other knobs I'm not properly tweaking, which is pretty likely at this stage.

Also, in thinking about it, if I can choose to give to charity via either QCD or appreciated securities/itemized deductions, I *think* (not having thought a ton yet) the only real difference is that one is above the line and the other below. So I believe that taxable income would end up basically the same either way; it's just AGI (thus MAGI) that would differ. So the real impact would be on potential IRMAA avoidance or at least reduction (and I guess potentially limiting the LTCG bracket for any other LTCGs I might choose to realize). And those will depend on the size of my other income streams. This of course assumes the gift amounts would be big enough for itemization.

I do still get a worse result when I do QCDs from my wife's TDIRA which is substantially larger than mine, which is still kind of weird.

Bottom line there's probably a good bit more nuance I need to investigate.

@nc-cpl

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Stuart Matthews

(@smatthews51)

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February 7, 2022 4:26 pm

@nevinsalumni-duke-edu Yes, that's counterintuitive, so I set up my own test of this without complicating it with Roth conversions. I started with scenarios 1 and 2 being identical with lots of money in husband and wife TD account and no charitable giving. Then I modified S1 with $20,000 of annual charitable giving as a QCD for 15 years from the husband's account, followed sequentially by the same set-up from the wife's account. Then I copied that to S2 and made one change: I unchecked the QCD box for the wife's contributions in S2. Then I compared the two scenarios. S1 yielded lower federal taxes and higher total savings at the end of the modeling period, as we would expect.

In the course of playing with this I did make an interesting observation that might be applicable to your case: the effect of the QCD is small or even negative if it causes depletion of the wife' TD account. In the case I tested, the QCD completely overwhelmed the RMD, thus driving it to zero. Then, when the spouse account was depleted and RMD/QCD disappeared, the AGI rose because of the loss of that deduction and then taxes rose which resulted in a worse long-term situation than with scenario 1.

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Bob Nevins

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Topic starter February 7, 2022 4:28 pm

And there is a fair amount of info out there on Mrs Google about pros and cons of QCDs vs gifting appreciated stock, which approach makes most sense in various scenarios, etc. @nc-cpl

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Stuart Matthews

(@smatthews51)

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February 7, 2022 4:30 pm

@nc-cpl Great question but the tool doesn't have that capability, at least not now. If you think there's some merit here, please make a post to that effect in the Wish List forum and we'll see where it leads. Thanks!

Stuart

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Bob Nevins

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Topic starter February 7, 2022 4:33 pm

@smatthews51 interesting! Thanks!

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(@nc-cpl)

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February 8, 2022 7:38 am

@smatthews51 A bit more on this topic...as I was adjusting QCDs to offset RMD's, I noticed that for both me/wife, RMD's show up at age 71 (Tab view). Isn't that a year too early due to the SECURE Act which changed the age for RMDs for owners of tax-deferred IRAs to 72 from 70 1/2?

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Stuart Matthews

(@smatthews51)

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February 8, 2022 7:54 am

@nc-cpl That depends on your age. If you turn 70 1/2 before 1/1/2020, RMD's still begin at age 70 1/2. With that said, note that the tab view shows your age on January 1 of any given year. So, if your birthday is any day other than January 1, you'll actually turn 72 in the year where your age appears as 71 and RMD's will begin that year (if you were born after 7/1/1949).

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