IRS Sets New Rules on IRAs, QCDs and More

Significant changes were made in individual retirement account (IRA) rules during the last few years. The IRS recently issued new guidance on some of those changes and how they interact with other rules.The Setting Every Community Up For Retirement Enhancement (SE-CURE) Act repealed the age limit on contributions to traditional IRAs.

Previously, contributions couldn’t be made after age 70. Now, there is no age limit on contributions, matching the rule for Roth IRAs. The removal of the age limit applies to contributions made after 2019.But a financial institution isn’t required to allow contributions to a traditional IRA after age 70½. It’s the custodian’s option, and the custodian can decide the date on which it will begin accepting those contributions.

In addition, before accepting contributions for IRAs of those older than 70½, a custodian must amend its IRA contracts and distribute new agreements and disclosure statements to each individual IRA holder. There also are new rules that prevent IRA owners from receiving double benefits from making deductible contributions after age 70½.

IRA owners cannot use contributions after age 70½ to offset required mini-mum distributions (RMDs). Remember, RMDs now aren’t required until age 72 for anyone who turns 72 after 2019.The IRS says contributions and distributions are separate transactions that must be taken and reported separately. That means even if you make a contribution to a traditional IRA for the year, you also have to take in full any RMD for the year.

The custodian will report the RMD on Form 1099-R, and you’ll have to include it in gross income. You might or might not be able to deduct the IRA contribution to offset the RMD, depending on your income level and whether you’re covered by an employer plan. Also, keep in mind that to make a contribution to a traditional IRA after age 70½ you must meet the other requirements for IRA contributions.

In particular, you must have earned income for the year that at least equals the amount contributed to the IRA. Earned income is earnings from a job or self-employment. So, a retired person still isn’t able to make contributions to a traditional IRA.Taxpayers also must be careful of the interplay between qualified charitable distributions (QCDs) and deductible IRA contributions after age 70½.

To review, a QCD is when money is distributed from a traditional IRA directly to a charity or the IRA custodian gives the IRA owner a check made payable to a charity that the IRA owner delivers to the charity.A QCD is not included in the gross income of the IRA owner. The owner also is not allowed to take a charitable contribution deduction for the distribu-tion. But the QCD does count toward the IRA owner’s RMD for the year. A QCD can be made only after age 70½. A taxpayer can make up to $100,000 of QCDs in a year. That limit is per taxpayer, not per IRA.

But the SECURE Act has a provision that prohibits an individual from combining a QCD and deductible post-70½ IRA contributions. The intent is to prevent a person from receiving the benefits of a QCD, while keeping the balance in the IRA steady.The rule says that the amount of a QCD excluded from gross income for the year is reduced by the aggregate amount of deductible IRA contributions for both that tax year and any earlier taxable years in which the individual was age 70½ or older by the last day of the taxable year of a contribution. These rules apply to contributions and distributions for taxable years beginning after 2019.

For example, suppose Max Profits turned age 70½ before 2020 and deducts $5,000 of IRA contributions in 2020 and 2021, then makes no IRA contributions in 2022. Max made no QCD in 2020 but made a $6,000 QCD in 2021 and a $6,500 QCD in 2022. Max has made $10,000 of aggregate deductible IRA contributions after age 70½. The amount of the QCD that is excluded from gross income each year is reduced by the aggregate post-70½ deductible IRA contributions of years after 2019.

So, none of Max’s QCD for 2021 can be excluded, because the $6,000 amount of the QCD is exceeded by the $10,000 of aggregate contributions.That leaves $4,000 of aggregate contributions that haven’t been used to reduce QCDs.

For 2022, Max’s $6,500 QCD is reduced by the remaining $4,000 of aggregate contributions. Max can exclude $2,500 of the 2022 QCD from gross income. If Max doesn’t make any deductible IRA contributions in future years, he’ll be able to exclude from gross income the full amount of future QCDs.

The full amount of each QCD still counts as part of Max’s RMD for the year. The rule only affects the amount of the QCD that is excluded from gross income.

The rule means that someone who plans to make contributions to a traditional IRA after age 70½ and also make use of QCDs at any time must keep good records of the contributions deducted after age 70½ and the amount that is used to offset QCDs each year.

For someone who is working after age 70½ and participates in a 401(k) plan at work, it’s probably better to contribute to the 401(k) plan instead of a tradition-al IRA. The contributions to the 401(k) will be excluded from gross income but aren’t deductible by the employee.The employee then can roll over the 401(k) account to an IRA and make a QCD.

The deferrals into the 401(k) and any employer contributions made to that account won’t offset any QCDs from the IRA.Keep in mind that QCDs can’t be made from 401(k) plans. They can be made only from IRAs, so money must be rolled over from the 401(k) to a traditional IRA to make the QCDs, or you already must have a traditional IRA.While on the we’re on the subject of QCDs, let’s look at some of the details.

First, remember that QCDs cannot be made to donor-advised funds, private foundations or supporting organizations.

They can be made only to public charities.In a year when a QCD is made from an IRA, the custodian will issue a Form 1099-R that will show the total amount of distributions from the IRA during the year. It won’t distinguish between QCDs and other distributions.You’ll report the full amount of the gross distributions on line 4a of your Form 1040. The amount of the tax-able distributions is reported on line 4b.

Next to line 4b, you should enter “QCD” to let the IRS know you excluded part of the distributions because they were QCDs. The new guidance is in the form of questions and answers posted to the IRS website in Notice 2020-68.