The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, of 2022 was a landmark piece of legislation. The bill covered a wide range of topics, investment/saving areas, and planning potential. There’s a lot to digest in its 1,000+ pages. And while areas have gotten a lot of media and pundit attention, others have gone unnoticed.
That includes a hefty number of new rules that makes donating to charity easier and more advantageous for many investors.
While philanthropy may be on a lot of investors’ minds, the new SECURE Act may just give many savers the nudge they need to turn their retirement savings into charitable giving.
A Focus on Qualified Charitable Distributions (QCDs)
Tax-deferred retirement accounts like 401ks and IRAs are wonderful vehicles for long-term savings. The ability to shelter savings from taxes for potentially decades to allow for stronger compounding is a wonderful tool for growing wealth. And given that, for many investors, these retirement accounts are their largest accounts, they can also serve as a basis for philanthropy.
The trick is getting the money out. You could just withdraw the money and then cut a check to a charity. However, you’ll still be subjected to the income taxes on the withdrawal and the tax deduction from the gift won’t be enough to cover the taxes owed in most cases.
A qualified charitable distribution (QCD) solves this dilemma. A QCD is a direct transfer of funds from your IRA—rollover or traditional—payable directly to a qualified charity. You can technically conduct a QCD from a Roth, but since distributions are tax free, it doesn’t make much sense. You must be at least 70½ years old at the time you request a QCD for it to count. The win is that a QCD withdrawal is excluded from your taxable income.
But QCDs have another bonus benefit. They can go toward reducing required minimum distributions (RMDs) from the IRA. Unfortunately, Uncle Sam won’t let you defer taxes forever; when investors turn 73, they are required to pull money out of their retirement accounts and pay taxes on them. However, amounts distributed as a QCD can be counted toward satisfying your RMD requirements for the year, up to $100,000. This could lead to significant tax savings.
The SECURE Act Sweetens the Pot
The SECURE Act 2.0 adds some interesting bonuses for investors when it comes to qualified charitable distributions.
Previously, the law limited QCDs to a hard $100,000 cap. This cap potentially hinders both charities and investors. The new SECURE Act changes that and provides annual inflationary boosts to the amount starting in 2024. With the QCD limit now indexed for inflation, investors have the ability to donate more and match a more realistic picture of their RMDs.
Secondly, the act provides more leeway as to what an investor can place their QCD into. Previously, rules required it to be a registered 501©(3) charity. However, now investors can take advantage of making a one-time QCD of up to $50,000 to fund a split-interest entity. Split-interest entities include Charitable Remainder Unitrusts (CRUTs), Charitable Remainder Annuity Trusts (CRATs) or Charitable Gift Annuities (CGAs). The QCD withdrawal used for this purpose would be excluded from taxable income and reduce RMDs. The $50,000 is also indexed to inflation starting in 2024.
Finally, the SECURE Act 2.0 itself kicks the can on RMDs in the first place. Starting this year, the age was extended to 73 and in 2033, the number will be 75.
Plenty of Planning Opportunities
With the SECURE Act 2.0 expanding charitable giving and qualified charitable distribution rules, financial planners and investors have a lot to be excited about.
For example, the beauty of split-interest entities is that they provide benefits for both the charity and the giver. A charitable gift annuity can be used to generate an income stream for the giver, while still providing a philanthropic benefit for the charity. Investors can potentially remove some RMD burden and save on taxes while still being able to generate income from their portfolios. If you just withdrew $50,000, you’d owe tax on the entire withdrawal. This is not the case if you used the QCD for a gift annuity. Part of a gift annuitiy’s yearly payments are tax-free returns of principal.
Moreover, the inflation-indexing of the QCD annual limit could be a boon for investors with large portfolios who are looking to limit their RMDs. It gives them more leeway in tax planning and could spur increased donations. It also could be real in so-called windfall years when an investor sees large gains in their retirement vehicles.
All in all, the SECURE Act adds charitable donations to the conversation for many investors, including those who never considered philanthropy before.
The Bottom Line
The SECURE Act 2.0 has a lot to offer investors. This includes a healthy scoop of charity and donation benefits. With the increases to qualified charitable distributions, retirement accounts can now be used as charitable vehicles as well.
