Case of the Week

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 at age 72 he will be taking required minimum distributions (RMD) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin does not feel he needs the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.

Question:

Having spoken with his advisor about making an IRA charitable rollover gift to charity, Quentin is excited to move forward. Quentin is preparing to direct his IRA custodian to make a distribution to his favorite charity when he remembers that he has a checkbook associated with his IRA account. Quentin wonders if he could skip the step of completing the custodian's form and write a check to the charity instead.

Solution:

While it would not be permissible for Quentin to request a distribution to himself from the IRA and then write a check for the same amount to charity from his personal checking account, Quentin may use his IRA checkbook to make a qualified charitable distribution (QCD). The IRA distribution must be a direct transfer from the IRA custodian to charity.

IRS Notice 2007-7 answers a number of questions related to the QCD rules. In Question and Answer 41, the Notice states, "If a check from an IRA is made payable to a charitable organization described in Sec. 408(d)(8) and delivered by the IRA owner to the charitable organization, the payment to the charitable organization will be treated as a direct payment by the IRA trustee to the charitable organization for purposes of Sec. 408(d)(8)(B)(i)." It would appear from the IRS' explanation that the key component is that the check is payable to the IRA owner. This is a gray area, but it seems that as long as Quentin makes the check payable to his favorite charity rather than to himself, the distribution may qualify as a QCD.

The advisor also explained that if Quentin decides to send the charity a check from his IRA checkbook, he should do so well in advance of the end of the year. The IRS "mailbox rule" usually allows checks mailed on December 31 and received by a charity in January to count as a charitable gift in the year the check was mailed. However, this rule may not apply to a check written by the IRA owner with check-writing privileges. The traditional IRA charitable rollover is made "directly by the trustee" to a charitable organization. When the IRA owner writes a check and delivers it to charity, the custodian of the IRA has not yet made the transfer. The custodian in this case will only act once the charity has deposited the check. Therefore, if the IRA owner puts the check in the mail on December 28, the charity receives the check on January 2 and then the check is deposited on January 3, the QCD will be reported in January, not in December. The IRA owner will have made a QCD in January of the new year. The operative determination is at what point did the IRA custodian direct the transfer and in which year will that transfer be reported on the Form 1099. This can be a particularly devastating issue if the QCD is intended to satisfy the IRA owner's RMD for the year. If the QCD is not made in time, the RMD will not be satisfied and the IRA owner may be subject to strict penalties.

Quentin decides to write a check to charity from his IRA checkbook. He makes the check payable to his favorite charity and puts it in the mail on November 1. The charity receives the check two days later and promptly deposits it, allowing Quentin to make his IRA charitable rollover before year's end.