Recently, we published an article titled: “Does the SECURE Act Affect Me?” In that article, we summarized the major provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act and explored the potential impact those provisions could have on your financial future.
Below, we further examine one of the opportunities the SECURE Act has created regarding Qualified Charitable Distributions:
What are Qualified Charitable Distributions?
Distributions from IRAs are generally taxable at ordinary income rates. As a result, certain taxpayers are often faced with larger-than-expected tax bills once their Required Minimum Distributions (RMDs) kick in, leaving them with little control over their taxable income and marginal tax brackets. One taxable income-reducing strategy available to taxpayers is the Qualified Charitable Distribution (QCD). A QCD is the ability to send IRA distributions directly to qualified charities, making the otherwise taxable distribution non-taxable. The benefit here is that QCDs are not taxed, but they do count toward satisfying the annual RMD, thereby enabling you to reduce the taxable portion of required IRA distributions in a given year1.
You can make QCDs of up to $100,000 in a year; however, you’ll need to be sure that the funds are transferred directly from your IRA to the qualified charity. And keep in mind – in order for the QCD to count toward your current year’s RMD, the funds must come out of your IRA by your RMD deadline, which is typically December 31.
Charitable Giving Post-SECURE Act
Before the SECURE Act was signed, the age at which you had to start taking RMDs from your IRA was 70.5. As we discussed in the previous article, starting in 2020, most individuals can wait until 72 to begin taking RMDs.
However, what hasn’t changed is that you are still allowed to start making Qualified Charitable Distributions (QCDs) from your IRAs beginning at age 70.5. This can give you an extra one- to two-year window (depending on your birth date) to make tax-free donations to qualified charities from your IRA. It is important to note that the IRA owner must have reached age 70.5 to complete a QCD. For example, if you turn age 70.5 on December 1 of a given year, you cannot complete a QCD for this year until at least December 1.
Why that’s a Benefit to You
If you have a substantial amount in your IRA and have charities you want to support, being able to make QCDs one to two years before you are required to take RMDs from your IRA (at age 72) will reduce your IRA balance and the amount of future RMDs. The higher your IRA balance, the higher your RMD, based on the IRS formula. By taking distributions from your IRA leading up to age 72 with the intention of reducing future RMD amounts, you can “smooth out” your future tax liability. Now taxpayers have one to two years to implement this strategy completely tax free, providing them with even more control over future RMDs and related tax liability.
One condition is that the charities you support must be public for you to qualify for the tax exemption. Private charities and private foundations are not eligible for these purposes. If you’re looking for public charities that are aligned with your values, Charity Navigator (charitynavigator.org) is an unbiased resource that reviews and rates thousands of charities to help donors make wise decisions and know that their gifts are being used appropriately.
Call on Us
Understanding the ever-changing tax landscape and the new SECURE Act can be daunting for non-professionals. At Modera, we stay on top of the issues that concern our clients and are available to consult with you at any time to help determine the strategies that make the most sense for you.
Want to learn even more about how the SECURE Act might affect you? Please contact us.
1Please note, RMDs have been waived in 2020 based on the passage of the CARES Act
Modera Wealth Management., LLC is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Georgia, North Carolina and Florida. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.
For additional information about Modera, including its registration status, fees and services and/or a copy of our Form ADV Disclosure Brochure, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.