For traditional IRA owners aged 70.5 or older, making qualified charitable distributions (QCDs) from their accounts offers a way to donate to a charity of their choice while reducing taxable income. However, among its many other changes to retirement plans, the Setting Every Community Up for Retirement Enhancement (SECURE) Act included provisions that have made QCDs more complicated for many IRA owners—particularly those who are still contributing to their accounts. If you are considering a QCD strategy, it’s important to understand the impact of these changes before deciding whether to make QCDs now or later.
What are qualified charitable distributions (QCDs)?
Through QCDs, IRA owners aged 70.5 or older can transfer up to $100,000 per year directly to qualifying charities of their choice; private foundations and donor-advised funds are not eligible. For those aged 72 and older, QCDs count towards the required minimum distributions (RMDs) that they must take each year from their IRAs—but unlike regular distributions, QCDs are excluded from taxable income. Therefore, they do not impact the IRA owner’s Social Security benefits or Medicare premiums. Additionally, taxpayers do not need to itemize deductions when they take QCDs, making them an attractive tax-free option for charitable giving in light of the higher standard deduction implemented by the Tax Cuts and Jobs Act.
How changes under the SECURE Act may affect QCDs
Two major changes under the SECURE Act have affected how QCDs work for many IRA owners. First, the SECURE Act eliminated age limits for contributing to an IRA for individuals who still have earned income. Previously, IRA contributions could only be made up to age 70.5, even for those who continued to work past this age. This change raised the concern that IRA owners would make tax-deductible contributions to their accounts and then gain a double tax benefit by distributing the income tax-free using a QCD. To prevent this, lawmakers included an “anti-abuse provision” in the SECURE Act, which reduces the amounts that may be used for QCDs by the cumulative amount of deductible IRA contributions made after age 70.5. For example, if an IRA owner makes deductible contributions totaling $10,000 after age 70.5 and then wants to make a charitable donation of $15,000 using a QCD, the QCD amount that may be distributed tax-free would be reduced to $5,000. The remaining $10,000 could be withdrawn from the IRA as a taxable distribution and treated as an itemized deduction if donated to charity.
The second change impacting QCDs comes from the fact that the SECURE Act raised the age when an IRA owner must begin taking RMDs from 70.5 to 72. This change allows flexibility for some IRA owners who would prefer to delay taking RMDs in order to avoid adding to their taxable income in a given year and to continue allowing their retirement savings to grow. But it may create a downside for those who make QCDs between the ages of 70.5 and 72: the QCDs can no longer be used to offset RMDs until age 72. However, QCDs will still reduce the IRA account balance, so RMDs taken later will be smaller and have less of an impact on taxable income.
Making QCDs after the SECURE Act
For IRA owners who want to make QCDs without adding to their taxable income, the following strategies may provide a solution:
- Don’t take a tax deduction when making IRA contributions. By opting to take QCDs tax-free rather than claiming tax-deductible IRA contributions, IRA owners aged 70.5 and older can avoid the SECURE Act’s anti-abuse provision while still growing their retirement savings and giving to a charity of their choice.
- If eligible, make contributions to a Roth IRA and take QCDs from the traditional IRA.
- Married couples where each spouse has their own IRA can coordinate their QCD strategy for maximum tax benefit: one spouse can make tax-deductible IRA contributions, while the other takes QCDs from their account.
While the SECURE Act has increased flexibility and expanded opportunities for retirement savings, this sweeping new law has also complicated tax-saving strategies for some retirees. If you are considering making QCDs from your IRA or have any other questions about how the SECURE Act may impact you, please contact our team of tax and financial professionals today to schedule a consultation!
-Stephanie Vance, J.D.
(Sources: https://www.kiplinger.com/article/retirement/t054-c000-s004-secure-act-changes-squeeze-qcds.html, https://www.marketwatch.com/story/what-happens-to-qualified-charitable-distributions-after-the-secure-act-2020-03-05).
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