The IRS Taketh But QCDs Can Giveth

Back in the day, 2019 and before, when someone with an IRA died, her heirs had their lifetimes in which to withdraw the funds from that IRA. They could stretch those withdrawals over several years. This practice came to be known as a "stretch IRA".

This ended in 2019 with the passage of the Secure Act. Under that law, unless it was a spouse who inherited the IRA, the funds in the IRA had to be withdrawn within 10 years. The reason for this change was that the IRS was tired of waiting for withdrawals and the resultant taxes on those withdrawals. Think of it this way: the tax code lets taxpayers defer taxes on contributions to IRAs until a certain age. However, the IRS wants the taxes on those contributions eventually. Thus, at a certain age, currently 73, the tax code requires taxpayers to start taking "required minimum distributions" or RMDs. This is so the funds in the IRA can finally be taxed.

When someone died, before the Secure Act, it was as if the clock for withdrawals reset. If the decedent had been taking RMDs, those stopped and were recalculated to fit within the heir's RMD schedule. After the Secure Act, the heir had 10 years in which to withdraw and be taxed on the inherited IRA. This is in addition to any RMDs the heir had to take with regard to her own IRA. The Secure Act left a few questions, such as, what if the decedent hadn't started taking RMDs at the time of death, and did the heir have to start taking RMDs from the inherited IRA immediately, or could she wait so long as the inherited IRA was depleted by the end of 10 years after it was inherited.

On July 19, 2024, the IRS answered these and other questions with its final regulations concerning inherited IRAs. Beginning September 17, 2024, if an heir to an IRA is an "ineligible beneficiary", the heir must take RMDs "at least as rapidly" as the original IRA owner, and must fully deplete the inherited IRA within 10 years. If the original owner had not been subject to the RMD rules, the heir can wait to take distributions so long as the inherited IRA is fully depleted within the 10-year period. An "ineligible beneficiary" is basically anyone other than a surviving spouse.

This requirement to deplete an inherited IRA within 10 years can have significant tax implications to the heir. In many cases, heirs to IRAs are still working and don't need the additional income at the time, nor do they want to pay taxes on the inherited RMDs. An IRA with a balance of $500,000 would need to pay out at least $50,000 annually to be depleted in 10 years. That's an additional $50,000 in taxable income to the heir.

One way to deal with this additional, unwanted income, is through Qualified Charitable Distributions, or QCDs. Anyone 70-1/2 years old or older can make a QCD directly from their own or an inherited IRA. The funds go to a qualified charitable organization, such as a university, religious organization, or other, and is not counted as income to the person making the QCD. The QCD satisfies the RMD requirement up to $105,000 in 2024.

If you are interested in looking closer at QCDs, contact a representative of the charitable organization's gift planning department, or your individual financial adviser.