Retirement Weekly: I used some of my IRA for a qualified charitable distribution. How is this reflected in my taxes?

by | Nov 4, 2022 | Stock Market

Dear Dan, Hello. Thank you for the opportunity to ask a question. This year I directed my traditional IRA custodial institution to send a contribution as a qualified charitable distribution. Much of the money in the IRA is from taxed income. How is this QCD reflected on IRS form 8606 that tracks the proportion of IRA funds that are taxable? Thank you in advance. Mark

Dear Mark, Congratulations on using qualified charitable distributions (QCD). For IRA owners over 70 ½, that is usually the most tax efficient way to give to qualified charities. It is especially good for persons that are subject to required minimum distributions and use the standard deduction. Normally, when one has nondeductible (after-tax) contributions to an IRA and later distributes funds from an IRA, a portion of the distribution is deemed to be a return of those after-tax contributions and is not taxed again. There is a calculation that reduces the amount of nondeductible contributions available for future years. A simplified example is say you had a total of $100,000 in your IRAs and you had made $20,000 of nondeductible contributions over the years. You decide to pull $10,000. Because $20,000 of the $100,000 is after tax and 20%, $2,000 of your $10,000 withdrawal is deemed “basis” and is untaxed. You now have $18,000 of basis that will be similarly applied “pro rata” to future withdrawals. This is all accounted for on Form 8606 and is done on a calendar year basis. If the $10,000 came out in four $2,500 transactions, you get the same result as one $10,000 …

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