SECURE Act: The effect on charitable giving
Retirement funds have long been an effective asset for charitable giving, particularly for planned giving. While family members must pay income tax when withdrawing funds, charities do not, so giving directly to nonprofits results in more impact.
The Setting Every Community Up for Retirement Enhancement Act, which became law on December 20, 2019, makes several changes that could make charitable planning with retirement assets even more appealing.
- Limitation of ability to utilize “Stretch IRA”. Prior to the Act, beneficiaries could choose to receive distributions throughout their lifetimes. The SECURE Act requires that IRA and other retirement account beneficiaries (other than spouses, minor children and some other exceptions) withdraw the entire fund balance within 10 years. In effect, this often increases the size of the distributions and the resulting taxes.
What this means for you: Since charities do not have to pay taxes on distributions, charitable gifts of retirement assets are even more impactful now. You might consider designating a charity – including an FFTC Donor Advised Fund, FFTC Designated Fund or FFTC Community Impact Fund – as the beneficiary of your IRA, while leaving other assets to family.
- Required Minimum Distributions now begin at 72. The age at which you must begin taking RMDs has been raised from 70 ½ to 72 years, but you may still direct qualified charitable distributions from your IRA when you reach 70 ½. To be a qualified charitable distribution, the RMD must be paid directly to a 501(c)3 public charity. Qualified charitable distributions are not taxable and do not count toward your adjusted gross income.
What this means for you: During this 18-month window, clients who make qualified charitable distributions will provide support to charities while simultaneously reducing the remaining amount in their IRA, future required minimum distributions and resulting taxes. While qualified charitable distributions cannot be directed to donor advised funds, they generally MAY be designated directly to public charities, including FFTC for the benefit of an FFTC Community Impact Fund, Designated Fund, Scholarship Fund or Field of Interest Fund.
- Additional Contributions to IRAs. If you have earned income, you can now make additional contributions to IRAs after age 70 ½ - with no age limit.
What this means for you: While this may present an excellent planning opportunity, these contributions could have tax implications for individuals who also make qualified charitable distributions. Any additional deductible IRA contributions made after reaching age 70 ½ will reduce, on a dollar-for-dollar basis, the amount of a qualified charitable distribution that can be excluded from the donor’s income. Instead, these amounts should be treated as income to the donor and qualify for a charitable deduction.
Our team would be happy to discuss these changes and how they may affect your charitable planning. Contact Robin Barefoot at firstname.lastname@example.org or 919.612.1629 for more information.
FFTC does not provide tax or legal advice. The information contained herein is for educational purposes and is not intended to be a substitute for individualized tax, legal, or investment advice.