A little over a year ago Joseph T. Maloy, Ph.D., C -’61 retired after more than fifty years of teaching chemistry at Ramsay High School (4 years), West Virginia University (9 years), and Seton Hall University (38 years). Earlier this year Joe and his wife, Marlene, celebrated this event by making unrestricted gifts to Saint Vincent via Qualified Charitable Distributions (QCDs) sent directly from their IRAs. Hoping that others might want to consider this method of giving, we have asked Joe to share some of the thought processes that he and Marlene went through as they prepared to make these gifts on the brink of retirement.
I am happy to respond to this request. Now that QCDs have been made a permanent feature of the IRS code, more IRA owners over 70.5 years of age are likely to be using them to make direct charitable contributions of up to $100,000 while simultaneously reducing the amount of taxable income needed to satisfy the Required Minimum Distribution (RMD) obligation for that account. While the popularity of QCDs seems surely to be on the rise, setting one up requires adherence to the IRS code, and due diligence is mandated. Insofar as our QCDs are concerned, I can explain what we did and describe some of the pitfalls we tried to avoid in making our gifts. Readers should be aware, however, that any interpretations of IRS regulations presented herein are my own opinions and not to be construed as tax or legal advice in any way. Please consult with your own tax/legal advisor if you wish to consider charitable giving with QCDs.
You mentioned the age 70.5 years along with RMD. What is the significance of this age and the term RMD?
Up until the age of 70.5 years, roughly the age of a golden jubilarian, funds invested in traditional IRAs can continue to grow (or decline) within the tax sheltered environment without mandated withdrawal. Beginning at age 70.5, however, owners of traditional IRAs must begin to withdraw funds from the tax shelter and pay taxes on the annual withdrawals as ordinary income. The required withdrawal is called the RMD, and it is computed annually as an age-based percentage of the value of the IRA at the close of business on December 31 of the previous year. (At age 70.5, the percentage is about 4%; at age 99 it is about 15%.) Some time during the calendar year IRA owners must withdraw an amount equivalent to the RMD (or more) from the IRA and pay income taxes on it. Taxes on the RMD can be avoided by donating some or all of it (up to $100,000) to charity. This is where the QCD comes in; it allows one to satisfy RMD obligations without taking on additional taxable income.
You’ve been addressing traditional IRAs held by an individual. What about employer plans such as 401k and 403b plans? Do they have the same RMD requirements as traditional IRAs?
Employer sponsored retirement accounts such as 401k and 403b plans have RMD requirements like traditional IRAs, provided that the employee has stopped working or an employee continues to work (beyond age 70.5 and is a 5% or greater owner of the company. Generally speaking, however, a non-company-owner can put off taking RMDs from 401k and 403b plans by continuing to work beyond the age of 70.5, if permitted to do so. In this instance, RMDs commence at the age of retirement.
You’ve been addressing traditional IRAs and employer sponsored 401k and 403b plans. Do all these plans allow QCDs?
No! Even though 401k and 403b plans are generally subject to the same RMD requirements as traditional IRAs, only members of the traditional IRA family allow QCDs. While the onset of taking 401k or 403b RMDs can be delayed by continuing to work past the age of 70.5, the direct donation of qualified funds from either of these plans is not permitted. In order to make a qualified donation from funds accumulated in an employer’s plan, the plan must be converted to a traditional IRA after retirement. This conversion process is known as a rollover.
This all seems to be pretty wonky. How do these arcane minutiae affect the donation of a QCD?
Clearly, your retirement funds must be held within a traditional IRA if you want to make a charitable donation via a QCD; employer plans are not eligible for QCDs. Workers who find themselves with substantial funds held within an employer’s 401k or 403b plan at retirement must establish a traditional IRA and then rollover all or part of the employer’s plan into the IRA if they wish to make a QCD after reaching age 70.5. In general it best to arrange for a custodian to custodian transfer of funds held within the employer’s plan to the IRA, particularly when different custodians are involved. Account owners who are comfortable with the IRA target of the rollover might want to consider doing the transfer in one fell swoop. (Funds left within the employer’s plan will be subject to separate RMD requirements the following year.) In doing a rollover, timing is of the essence. If one wishes to make a QCD from an IRA next year, the funds must be transferred from the employer’s plan to the IRA before the close of business on December 31 of this year. Missing this deadline by a day could delay your ability to make a QCD for more than a year.
So how did this pertain to your specific situation?
As Marlene and I were approaching retirement we had four different retirement accounts. We both had traditional IRAs; she had a 401k plan with her employer; and I had a 403b plan with mine. As we each retired, we rolled our employer plans into our respective IRAs. She retired first before reaching the age of 70.5 years, but I delayed the RMD onset by working for many years past that age. When I finally did retire, I took care to complete my IRA rollover prior to December 31 so that these funds would be available in the IRA for QCD the following year. This increased our taxable income for the prior year by having both earned income and RMD income in the same year, but it avoided the possibility of having double RMD income in the latter year (with no ability to offset it with a QCD).
You stated above that you and Marlene each submitted checks drawn upon your separate IRAs in making your QCDs to Saint Vincent. What was your rationale for doing this?
There are two answers to this question, one business, the other personal. Even though we file a joint tax return, IRAs are classified by the IRS as individually-owned accounts, and each has its own separate RMD computation. QCDs drawn on each account can be used to offset the tax consequences of the RMD for that account but not the other. Whatever either of us can donate via QCD is an amount that she or he would not have to withdraw from the tax shelter in order to satisfy her or his RMD obligation. Now, from a personal perspective, the answer is much more straightforward. Marlene and I began the circle of our married life at Saint Vincent nearly fifty years ago, and it is our intention that it will end here where it begun. With this in mind we have each been making independent contributions to Saint Vincent for several years now. Her commitment to Saint Vincent is no less than mine; in fact, her annual contributions are usually greater than my own.
Thank you for giving annually to Saint Vincent. What has motivated you to this, and given this history, why do you now want to up the ante with a QCD?
I began contributing to Saint Vincent out of gratitude for the four year scholarship that was given to me by the college over sixty years ago. This full tuition scholarship was based on both need and ability - and in my case the need far exceeded the ability. I would not have been able to attend Saint Vincent or any college without receiving substantial aid. After graduating and entering the workforce, I made the commitment to repay Saint Vincent for the gift that had been given to me. At that time I was on the hook for around $3,000 – four years at approximately $750/year. Over the years I was gradually able to increase my annual contributions to the point that my most recent gifts did manage to exceed the yearly tuition during my time at Saint Vincent. I was never able, however, on a teacher’s salary, to come up with a gift that was in any way comparable to the current annual tuition. With QCDs in place of my RMD, however, gifts of that magnitude become possible, and it was with this in mind that we embarked upon this journey. Marlene likens it to the repayment of a student loan; if so, it is one of longest-standing in the history of borrowing in that it commenced prior to the existence of the federal loan program established by the NDEA in 1958.
So would you say that you came to Saint Vincent primarily because of the scholarship offer?
No. I had other options and other scholarship offers. (No matter where I had gone, the financial need would have still been the same.) The toll on the final road considered but not taken was to be paid by Mesta Machine (no longer in business) who wanted to send me to Carnegie Institute of Technology (now Carnegie Mellon University) so that I could become an engineer; same offer, with higher tuition. (Had I taken that road and found success, to whom would I sending this message today?) But I didn’t want to become an engineer. I wanted to become a teacher, and Saint Vincent offered me the opportunity to be what I wanted to be. That, and the fact that it was a Catholic institution, sealed the deal for me. At the time I was unaware of the rich Catholic intellectual tradition exemplified by the Benedictines for close to two millennia. God does work in mysterious ways, even now.
Is there anyone you would want to mention who had an impact on your personal and professional life?
Of course; since I was a teacher in training during my time at Saint Vincent, I sought out the good teachers and did my best to emulate them. I remember with great fondness John Dunn (Composition 1); Father Marinus (Analytic Geometry and Calculus 1); Father Maynard (Composition 2 and British Literature 1 & 2); Father Melvin (German 1 & 2); Father Colin – later changed his name back to Paul - (Logic and Philosophy); Father Roderick (European History); John Johnson (Statistics); Frau Vera Slezak (German 3 & 4); Father Clement (Modern Algebra); Father Roland (Physics 3); and Bill Dzombak (Analytical Chemistry and Physical Chemistry 1). Each of these instructors shared two common characteristics. Each came to each class well prepared, and each cared deeply about the development of students. After knowing these teachers, I would do my best to emulate their virtues for more than half a century. As an undergraduate I majored in mathematics and eventually I did earn a B.A. in math. I was in teacher training, however, so I elected to take additional chemistry and physics courses to expand my teaching repertoire. I became a high school math and science teacher, only to discover that I preferred teaching science – chemistry in particular – to teaching math. As I looked into changing majors I came to discover that my Saint Vincent education was not yet complete even though I had already graduated. I had maintained contact with Father Roland and Bill Dzombak, and acting on their advice I satisfied my teacher certification requirements by taking organic chemistry in the summer and second semester physical chemistry in the evenings in lieu of audio-video education courses. When the time came to apply to graduate school in chemistry, I had the coursework equivalent of a degree in chemistry. Dzombak wrote letters of support to several graduate schools and offered sound advice when the time came to make a selection. Much of my success in gaining admission to the University of Texas - arguably one of the top ten chemistry departments in the nation - was due to him.
Why would you direct a young woman or man to attend Saint Vincent College?
We live in troubling times, not unlike those that Benedict encountered in the sixth century when he had a front row seat for the fall of Rome. He understood, as we should today, that it was time to wake up and hasten to do those things that will profit us in eternity. Seeking this profit he established his monastic order as a school of the Lord’s service. Thus, he viewed his life’s work as an educational enterprise; I know of no earlier reference to Catholic education. We also live in changing times, a fact that was no doubt known by Benedict, but explicitly embraced by Boniface Wimmer in the founding of Saint Vincent. His view of American monasticism as moving “Forward, Always Forward” has become the motto of the most recent development campaign. Always moving forward but being rooted in longstanding Benedictine tradition seems to me the best place to be while seeking those things that will profit us in eternity. It is in this hope that I would recommend Saint Vincent to any young person, particularly one who wants to be what she or he wants to be.