Missed RMDs and QCDs

by Craig Moser on September 15, 2017

Qualified Charitable Distributions (QCDs) are now a permanent part of the tax code.  They allow individuals who are at least 70 ½ years old (at the time of the transfer) to directly transfer IRA funds to a qualifying charity.  In this scenario, you don’t get a charitable deduction for the transfer, but you don’t have to claim the money as income either.  The QCD transaction can also satisfy a required minimum distribution (RMD) for the year.  There is a cap of $100,000 per year, per IRA owner for QCDs.

QCDs and RMDs

To further explain, let’s look a scenario involving 71 year-old Tony.  Inheriting an IRA several years ago, he didn’t take a RMD distribution.  He recently realized the mistake is withdrawing them during 2017.

IRA distributions are taxed the same year they are withdrawn, regardless of which year the RMD distribution satisfies.  He has to report all distributions for previous years as income for 2017.  Because the additional income has a significant impact on his 2017 taxes, using a Qualified Charitable Distribution (QCD) is a better strategy.

Using A QCD To Satisfy The RMD

The tax code and regulations say a QCD can satisfy an RMD.  They don’t specify the QCD can only satisfy the current year’s RMD.  In addition, any RMD amount missed for one year is added to the next year’s RMD.  So, if Tony’s 2016 RMD is $10,000 and his 2017 RMD is $12,000, his total 2017 RMD is actually $22,000.

If Tony takes all missed RMDs during 2017, he also generates taxable income for 2017.  Instead, he transfers the $22,000 RMD amount from his IRA directly to a qualifying charity as a QCD.  When filing 2017 taxes, he shows the amount transferred to charity and notates “QCD” so it isn’t included in income.  In short, he makes up the missed RMDs with no tax cost.


Form 5329

In addition to paying the missed RMD, Tony reports the missed RMDs on Form 5329.  ne form is filed for each year an RMD is missed.  Missed RMDs are also subject to an additional tax of 50% of the amount not taken each year.  However, the IRS can waive the additional tax for good cause, so Tony is requesting a waiver.  While not guaranteed, the IRS usually grants this type of request.

In this case, Tony makes up his missed RMDs at no tax cost, receives a waiver of the 50% additional tax, and was able to help a charity.  While there isn’t a guarantee the IRS will forgive the error in the future, he can now begin taking regular RMD withdrawals each year.  Everything worked out because of his age and the fact his missed RMDs total less than $100,000.




Ready to get MORE out of your retirement?

Kickstart your retirement plan by requesting our complimentary MORE toolkit today.
Here's what you'll get:

Customized Social Security Benefit Summary
to help maximize the payments you are entitled to

Financial Organizer
to summarize all aspects of your financial affairs

Portfolio Evaluation
showing how your investments have performed historically and the fees that you are paying

Show Buttons
Hide Buttons