Monday September 25, 2023
Case of the Week
Gifts from IRAs, Part 7
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 he will soon be taking required minimum distributions (RMD) 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.
Question:After learning about the pitfalls of using an IRA charitable rollover gift to fund a donor advised fund (DAF), Quentin wonders if he can donate to a field of interest or designated fund with his local community foundation. He likes the idea of making a charitable gift to target a specific area of charitable need. Quentin asks his advisor if a qualified charitable distribution could be made to a field of interest or designated fund gift.
Solution:Quentin's advisor explains that while Sec. 408(d)(8)(B)(i) prohibits IRA charitable distributions to DAFs, distributions to field of interest funds are not prohibited. An IRA owner who has reached age 70½ may direct the distribution of up to $100,000 in any tax year directly from the IRA custodian to a field of interest fund. The charitable organization holding the field of interest fund will determine how to use the distribution to benefit that field of interest. Quentin likes this idea and decides to make his QCD to a field of interest fund.
Quentin contacts his local community foundation to start the process of using his IRA QCD to create or donate to a designated field of interest fund. He will need to indicate his intention for his IRA QCD prior to the distribution from his IRA custodian. Quentin understands that he will not have any advisory privileges over his donation, but he is able to designate the area of interest for his charitable gift to be used.