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October 12, 2020

What the SECURE Act Means for Qualified Charitable Distributions

Please read important disclosures HERE.

A qualified charitable distribution (QCD) is a direct transfer of funds from an IRA account to a qualified charity. As long as certain conditions are met, a QCD may count towards satisfying one’s required minimum distribution (RMD) for the year.

In order to make a QCD, an individual must (1) own a traditional or inherited IRA, (2) be over age 70 ½, and (3) limit the annual total QCD contributions from all IRAs to $100,000 per year. It’s important to note that a QCD is not included in a person’s adjusted gross income for income tax purposes.

What Changed for QCDs With the Passage of the SECURE Act?

In December, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law with the aim of expanding the retirement saving options available to Americans. The act suddenly overhauled many of the retirement account rules that had been in place for numerous years. For instance, the act changed the start date for RMDs from age 70 ½ to 72. Additionally, the act repealed the age limit cap of 70 ½ for making tax-deductible IRA contributions. Individuals over the age of 70 ½ are now allowed to make tax-deductible traditional IRA contributions limited to the lesser of $7,000 (in 2020) or taxable compensation for that specified year. However, the age for making QCDs has not changed. As before, individuals older than 70 ½ are still allowed to make QCDs in amounts up to $100,000 per year.

With the repeal of the age limit cap for making tax-deductible IRA contributions, it would have been possible for individuals over age 70 ½ to make a tax-deductible traditional IRA contribution one year and subsequently make a QCD with those same dollars the next. In a sense, individuals could reap the tax advantage from the initial tax-deductible IRA contribution as well as the tax benefits from a QCD. To prevent double-dipping of these tax advantages, lawmakers included a new ‘anti-abuse’ provision in the SECURE Act that reduces the amount of an eligible QCD by the cumulative amount of total post-70 ½ IRA contributions. As a result, all post-70 ½ IRA contributions must be tracked against any QCDs over the lifetime of the individual.

Here’s one scenario to consider…

Beatrice turns 70 ½ in 2021, but she is still working part-time, earning $15,000 per year. In order to minimize her taxable income, Beatrice makes a $7,000 tax-deductible contribution to her traditional IRA. She continues to make deductible IRA contributions in the amount of $7,000 for three additional years (a total of $28,000), at which point she retires.
In 2027, Beatrice decides to make a $40,000 QCD to a charity. Given the anti-abuse rule, Beatrice will claim $12,000 as a QCD. In addition, on her 2027 income tax return, Beatrice will include the remaining $28,000 as both taxable income and as a charitable itemized deduction.

Planning Opportunities for QCDs?

Although the anti-abuse rule can limit a person’s ability to designate QCDs, there are still several tax-saving strategies to consider for those age 70 ½ and older who are working, contributing to a traditional IRA, and interested in making a QCD. For example:

  • Married spouses who each have their own IRA may designate one IRA account to receive post-70 ½ contributions, leaving the other IRA to make QCDs without restrictions.
  • Individuals may also opt to “burn-through” their post-70 ½ contributions by making substantial charitable gifts from their IRA to charities. Since Beatrice made a $40,000 QCD contribution in 2027, she “burned-through” her $28,000 total post-70 ½ deductible traditional IRA contributions. Any subsequent charitable distributions that Beatrice decides to make can be directly designated as a QCD.
  • Lastly, individuals may voluntarily withdraw traditional IRA contributions by October 15th of the year following the year in which the contribution was made. In practice, Beatrice could have removed her 2024 $7,000 deductible contribution by October 15, 2025 if she wanted to reduce the amount excluded from her QCD designation. This strategy offers flexibility to individuals who become more charitably inclined over time or who find a cause they wish to support.

With the repeal of the age limit cap on traditional IRA contributions and the addition of the anti-abuse provision, the SECURE Act has complicated the QCD process. However, with careful planning and utilization of the strategies mentioned above, individuals may make informed decisions when determining how and when to make tax-efficient QCDs.

If you would like to learn more about QCDs, please contact your tax professional or a member of your B|O|S wealth management team.

Filed under: Financial Planning

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