Wednesday September 27, 2023
Case of the Week
Gifts from IRAs, Part 8
Case:Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.
With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now in his early 70s, Quentin realizes that at age 72 he will be taking required minimum distributions (RMDs) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin does not feel as though he needs the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.
Each year, Quentin's favorite charity hosts an end of the year holiday fundraising gala. As he has done each of the last five years, Quentin marked the gala on his calendar well in advance. While working through his IRA tax planning options, Quentin took a break to check his email. At the top of Quentin's inbox was a note from the charity reminding him to purchase his ticket soon before the gala sells out.
Question:After reading this reminder, Quentin wondered whether he could use part of an IRA qualified charitable distribution (QCD) to pay for his ticket to the gala. While the idea is still fresh in his mind, Quentin sends an email to his trusted advisor asking whether an IRA charitable rollover can be used to purchase tickets to charity events.
Solution:Several hours later, Quentin received an email back from his advisor explaining that IRA charitable rollover distributions will not qualify if there is a "quid pro quo." A quid pro quo benefit does not include intangible religious benefits or naming privileges, but does include tangible benefits such as preferred seating or event admittance. Under Sec. 408(d)(8)(C), a distribution will only be considered a qualified charitable distribution if the entire distribution would otherwise be an allowable deduction under Sec. 170. If Quentin uses his IRA QCD to purchase a ticket to the gala, the entire distribution from his IRA will be disqualified as an IRA charitable rollover gift. This outcome will occur even if Quentin's IRA QCD gift is in excess of the gala ticket's cost. After this correspondence with his advisor, Quentin decides to use cash to purchase tickets to the charity's gala. Quentin decides to make a separate IRA charitable rollover gift because he understands the benefits of using his IRA QCD to further his favorite charity's mission.
Published August 26, 2022