Catch-QCD: Why You Might Not Want to Make a Deductible IRA Contribution After Age 70 ½

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Introduction

Up through the end of 2019, it was impermissible for taxpayers to make a contribution to a regular IRA starting with the year in which they turned 70 ½.  This age restriction did not (and does not) apply to contributions to Roth IRAs.  Section 107 of the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, repealed this age restriction.  However, there is a provision in this section that, in many cases, may reduce or negate the benefit of this repeal.

The Benefits of Qualified Charitable Distributions (QCDs)

Code Section 408(d)(8) allows IRA holders to make QCDs or up to $100,000 per year from their IRA balances, starting with the date that they turn 70 ½.   QCDs are transfers directly from IRAs to most types of charities, with some important exceptions including private foundations and donor-advised funds.  QCDs count towards the required minimum distributions (RMDs) that must be taken from regular IRAs starting with the year in which the IRA holder turns 72.  (The SECURE Act raised the RMD beginning date from 70 ½ to 72.)

QCDs are not included in the adjusted gross income (AGI) of the donor, nor do they qualify as deductible charitable contributions.  Taxpayers who cannot claim the full amount of the contribution as an itemized deduction will be able to exclude the entire amount of the QCD from AGI, which essentially provides the same tax savings as a full deduction.  Full itemization is now much rarer than before, due to the individual tax provisions of the Tax Cuts and Jobs Act that became effective for 2018 and beyond.

Reduction of AGI can also give rise to significant tax benefits in other situations, depending on the taxpayer’s specific circumstances.  Potential examples include:

  • Reduction in the percentage of Social Security benefits that is subject to income tax;
  • Reduction in the 3.8% tax on net investment income;
  • An increased ability to deduct rental losses; and
  • An increased amount of medical expense deduction.

There can also be a significant non-tax benefit to a reduction in AGI, in that the insured’s share of Medicare Part B and Part D premiums is based in part on the insured’s AGI.

Here’s the Catch

The drafters of the SECURE Act believed that it would be double-dipping for a person to be able to both (a) make a deductible contribution to an IRA and (b) make a QCD of the amount deducted.  Therefore, Code Section 408(d)(8)(A) requires that the amount of any QCD be reduced, dollar-for-dollar, by the cumulative amount of any deductible contributions to IRAs for years starting with the year in which the donor turned 70 ½, to the extent that this cumulative amount has not already reduced the amount of QCDs in prior years.

For example, Carlton, a former professional athlete born in 1947, decides that he wants to make annual deductible IRA contribution of $7,000 based on his income from autograph signings and motivational speeches.  He makes these contributions every year from 2020 through 2024, totaling $35,000.  In 2024, he makes a direct transfer of $50,000 from his IRA to a qualifying charitable organization.  Instead of being able to treat all $50,000 as a QCD, he can only treat $15,000 as such.  The remaining $35,000 is included in his AGI, and he can claim an itemized charitable deduction for that amount.

So What Are the Implications?

Although the ability to make deductible IRA contributions after age 70 ½ has great surface appeal, taxpayers should give careful consideration to whether it is wise in their particular circumstances.  It would be a good idea for them, at around age 70, to plan out their anticipated use of QCDs over the remainder of their lives.  After doing so, they can assess whether a deductible contribution makes sense.

As mentioned at the outset of this post, this restriction does not apply in the case of contributions to Roth IRAs.  For taxpayers over age 70 ½, this may make Roth IRA contributions a much more appealing alternative than regular IRA contributions.