Qualified Charitable Distribution (QCD)

[HonestAbe1]

I'm a little confused about a limitation on QCDs. I have both a SEP IRA into which I still contribute, and a traditional IRA. I'm over 701/2. Say I contribute a deductible amount of $5,000 to the SEP IRA in 2023. Can I make a non-taxable $1,000 QCD distribution from the traditional IRA for 2023? How does Turbotax handle this circumstance?

[dmertz]

Nothing about the SEP IRA prevents you from making a QCD from the regular traditional IRA.  As long as you have at least $1,000 of pre-tax money in all of your traditional IRAs, you can make a $1,000 QCD from the regular traditional IRA.  You just can't make a QCD from the SEP IRA since it's an ongoing SEP IRA.  (Nothing prevents you from doing a trustee-to-trustee transfer of funds from the SEP IRA to the regular traditional IRA to be able to make a QCD from the regular traditional IRA.)

When you are over age 70½ and enter a Form 1099-R that has code 7 in box 7 and the IRA/SEP/SIMPLE box marked, TurboTax will ask if you had any of the distribution transferred to charity and, if so, the amount transferred to charity.  TurboTax will include this amount on Form 1040 line 4a but exclude it from the amount on line 4b with the "QCD" notation next to this line.

[HonestAbe1]

Thanks for this answer. Much appreciated. However, what is confusing is that the IRS instructions (Pub 590) says: 

"Offset of QCDs by amounts contributed after age 70½. Beginning in tax years after December 31, 2019, the amount of QCDs that you can exclude from income is reduced by the excess of the aggregate amount of IRA contributions you deducted for the taxable year and any prior year that you were age 70½ or older over the amount of such IRA contributions that were used to reduce the excludable amount of QCDs in all earlier years."

Does that not suggest that if you made a deductible IRA contribution (or contributions after turning 701/2), whether to a SEP IRA or Traditional IRA, then the QCD up to that amount is not excludable from taxable income? I wish the wording was clearer.

[dmertz]

Now I understand your concern.  Section 408(d)(8)(A)(i) of the tax code says that in and after the year the taxpayer reaches age 70½, "deductions allowed to the taxpayer under section 219" of the tax code reduce the amount of QCDs that are excludible from income.  The deduction for those contributions is reported on Schedule 1 line 20.  SEP contributions are not such contributions.  SEP contributions are employer contributions (even for the self-employed).

Some SEP IRA custodians allow regular traditional IRA contributions to be made to SEP IRAs and those would be the same as if they were made to the regular traditional IRA, deductible on Schedule 1 line 20.   It's generally recommended that one not make regular traditional IRA contributions to a SEP IRA due to the potential for the IRA custodian to confuse these for SEP contributions.

[HonestAbe1]

Thank you!