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Advisor's Quarterly Update

The SECURE Act and Charitable Giving

The “Setting Every Community Up for Retirement Enhancement” Act, aka the SECURE Act, was among several bills attached recently to a “must-pass” appropriations bill that was signed into law on December 20, 2019. The SECURE Act includes many changes to the rules governing retirement plans, including several provisions of particular interest to clients in or approaching retirement. All the rules described below became effective on January 1, 2020.

1. RMD starting age increased from 70½ to 72.  The age at which the owner of an individual retirement account (IRA) must start taking required minimum distributions (RMDs) has increased from 70½ to 72. This change means that IRA owners who turn 70½ in 2020 or later can accumulate assets tax-free in their IRAs for, on average, an additional one-and-a-half years before they must start taking minimum distributions. This change also applies to 401(k)s and other qualified retirement plans.

The minimum age for making qualified charitable distributions (QCDs, aka charitable IRA rollovers) from an IRA remains 70½. However, fulfilling an RMD will no longer be an incentive for a client between age 70 ½ and age 72 to make a QCD. However, for clients who take the standard deduction rather than itemize, using QCDs to make charitable gifts will remain the most tax-efficient way to make gifts once they reach 70½ and before they are required to take their RMD at 72.

2. No age limit on traditional IRA contributions for working IRA owners. There is no longer an age limit on making contributions to a traditional IRA for IRA owners who continue to work beyond age 70½. This change will enable these IRA owners to accumulate greater amounts in their IRAs, as ROTH IRA owners were already able to do. As explained below, these additions will not necessarily translate into larger QCDs.

Deductible amounts that an IRA owner contributes after reaching age 70½ will reduce, dollar-for-dollar, the amount of a QCD that can be excluded from the donor’s income. For example, if the donor of a $50,000 QCD has contributed $20,000 to her IRA since turning 70½, only $30,000 of the QCD will be excludable from her taxable income. The donor will be able to itemize the other $20,000 as a charitable deduction, but due to deduction limitations and other factors, this deduction may or may not completely offset the $20,000 of additional taxable income. If the donor above makes no further IRA contributions and makes another $50,000 QCD in a subsequent year, all $50,000 will be excludable from her taxable income because she included the $20,000 in her income previously. Needless to say, this rule complicates the decision to make QCDs for IRA owners who make deductible contributions to their IRA when older than 70½.

3. “Stretch” IRA eliminated for most non-spouses. When a deceased owner’s IRA is inherited by a non-spouse who is more than 10 years younger than the deceased, no longer can the new owner “stretch out” distributions over her life expectancy. Instead, the new owner must empty the inherited IRA within 10 years (unless the heir is a minor child of the deceased owner, chronically ill, or disabled). However, there are no RMDs during the 10 years. The owner can take distributions any way she wants as long as she withdraws all funds within the 10 years. Designated beneficiaries of IRAs inherited prior to 2020 are grandfathered in under the old rules; they can continue to take distributions over their life expectancies.

The elimination of the “stretch” IRA for non-spouses will discourage IRA owners from passing their IRAs to family members who are much younger than they are, such as children or grandchildren. For charitably minded IRA owners, the elimination of the “stretch” IRA creates an additional incentive to designate what’s left in their IRA to one or more charities and use other funds to benefit their heirs. Doing so will also avoid income tax on the IRA funds because charities are tax-exempt.

For clients with large IRAs (or other qualified retirement plans) who wish to provide lifetime income to heirs and make a generous gift to charity, designating a testamentary charitable remainder trust as the beneficiary will be more attractive under the new law, since a popular non-charitable alternative for providing lifetime income to heirs – the “stretch” IRA - is no longer available.

Conclusion
The SECURE Act made changes to the laws governing retirement plans that offer the potential, at least, to increase donations of retirement plan assets to charity. On the one hand, the increase of the age at which an IRA owner must take RMDs will remove one strong incentive for donors between 70½ and 72 to make QCDs, although larger IRA balances may lead to larger QCDs from age 72 onward. That said, a QCD between age 70 ½ and 72 offers non-itemizers the same tax benefits of an itemized deduction.  On the other hand, the elimination of the “stretch” IRA gives IRA owners even more reason to designate IRA assets for charity and other estate assets for heirs. Perhaps most importantly, these changes give you a reason to get in touch with your clients to inform them about the changes, to respond to their questions, and to provide guidance for their charitable giving in 2020 and beyond.