The recently passed SECURE Act has made several changes to retirement plans, some of which could result in an increase in the amount of money being left to charities. So what has changed?
Increase In Required Minimum Distribution Age To 72
The SECURE Act increases the age at which people are required to begin taking distributions (RMD) from their individual retirement accounts, or IRAs. Before the passage of the SECURE Act, required distributions had to be made once an IRA owner turned 70 ½. Under the SECURE Act, the age now is 72.
How does this affect charitable giving? The SECURE Act left unchanged the age at which people could make qualified charitable distributions, or QCDs, to charities from their IRA accounts. That remains age 70 ½.
Utilizing QCDs at age 70 ½ can reduce future required distributions from an IRA account at age 72. It is likely that people who can wait until age 72 to take their RMDs have other income or assets to support their lifestyle and are looking for ways to reduce the required amount at age 72. Making QCDs has an advantage over Roth IRA conversions or withdrawing funds from IRA accounts before age 72, in that a QCD is not taxable and actually is not even included in adjusted gross income calculations, which can help reduce other taxes or Medicare Part B premiums.
Limitation Of Ability To Stretch RMDs From Inherited IRAs And Other Qualified Plans
Retirement accounts, such as an IRA or a 401(k) plan, have never been a great asset to leave to heirs. Now under the SECURE Act, they are even worse. For those charitably inclined, naming a charity as the beneficiary of a portion of, say, your IRA instead of as a direct bequest under your will has always been a more tax-efficient way to leave money to heirs.
That’s because retirement assets do not receive a stepped-up basis at death, so most beneficiaries are required to pay income tax when withdrawing funds from these accounts. However, charities are tax exempt organizations and, thus, are excluded from having to pay income taxes on investment accounts such has an IRA. So leaving nonretirement assets to your kids and naming your favorite charities as beneficiaries of your IRA or retirement account can save your kids income taxes. Note: You would not do this with a Roth IRA or Roth 401(k) account since those accounts would provide tax-free income to your kids. (Still leave other assets to charity if you like.)
The SECURE Act has shortened the time frame for when the entire retirement account balance needs to be fully liquidated. What used to be life expectancy of the beneficiary has been shortened to 10 years for all beneficiaries with five exceptions. Spouses, children under the age of majority, disabled or critically ill beneficiaries, and people less than 10 years younger than the deceased account owner can still use their life expectancy when determining how much they have to distribute each year.
This can be a dramatic tax difference for many beneficiaries. For example, under the old law, a 25-year-old could stretch their distributions over 58.2 years. Under the new law, it now becomes 10 years. The shorter time frame will accelerate the payment of tax and could also result in an increase in the actual tax paid depending on over how many years the beneficiary spreads the withdrawals from the retirement account.
The increase in both timing and amount of tax post SECURE Act should have you even more so consider naming a charity (directly or via a charitable remainder trust, or CRT) as a beneficiary of your retirement accounts (other than Roth IRAs and Roth 401[k]s). Naming a CRT as the beneficiary of your retirement account instead of your children can lengthen the time beyond 10 years, while also helping charities. Set up properly, the term of payments to your kids from the CRT can last beyond 10 years with any balance remaining going to charity.
All the above should be considered positive for charitable giving. However, none of these advantages will take place unless planners (financial and charitable) bring these ideas to their clients. Granted, no one gives for the tax deduction, but once a decision to give is made, we can help our clients figure out how to give most efficiently, which can include giving more.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any of the strategies discussed above.
