Get IRA Checkbook Gifts in Early | Sharpe Group
Posted November 18th, 2019

Get IRA Checkbook Gifts in Early

As we approach the end of the year, many nonprofits experience their highest level of donations. This rush of individual gifts, and holiday vacations, can sometimes slow down organizational processes of depositing and receipting gifts. For almost all types of gifts, this delay has no tax consequences.

For example, if a donor mails a check to a nonprofit, that donation is deductible the moment the mail carrier picks up the letter. Gifts from credit cards are transferred nearly instantly and are also immediately deductible. However, this convenient timing circumstance is not true for a relatively new type of gift: The IRA checkbook QCD gift.

QCD stands for Qualified Charitable Distribution. This is an ideal gift for donors age 70½ or older. These donors are forced to take required minimum distributions (RMDs) out of their IRAs or face a 50% penalty. These RMDs count as income. But, a QCD transfers funds directly from the IRA to a charity, counts against the RMD, and doesn’t count as income. A donor can give up to $100,000 per year this way, even if their RMD is much less. For many reasons, having no income (via the QCD) is better than having income and a deduction.

The IRA checkbook is a growing phenomenon where financial institutions allow account holders to have a checkbook for their IRA account. Instead of requesting a transfer from the IRA custodian, the account holder simply writes a check whenever funds are needed. Combining these two tools is the IRA checkbook QCD gift. The donor simply writes a check to the charity from an IRA checkbook. That gift can qualify as a QCD. The IRA custodian reports the distribution on Form 1099-R, counting towards the RMD. The donor reports the distribution as a non-taxable QCD on the donor’s tax return. This is a convenient way for donors to make QCD contributions throughout the year.

However, a timing problem can arise at the end of the year. This is a QCD gift must qualify under both the normal charitable deduction rules and the QCD rules. These QCD rules require action by the custodian, not just the account holder.

What happens if the donor writes a check to the charity from an IRA checkbook and the charity doesn’t cash the check until January? The IRA custodian does not act in the earlier year. The 1099-R Form issued by the custodian will not include the QCD in the earlier year. The IRS can penalize the donor for 50% of the undistributed RMD in the earlier year. Although the QCD will count in the later year when the check is finally deposited, this is small consolation to a donor who has to pay the 50% penalty. In order to avoid the penalty, the charity should deposit the check in enough time so that the funds will transfer out of the IRA prior to the end of the year.

Notes. See IRC §§ 408(d)(8)(C), 408(d)(8)(B)(i)

By Russell James

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