By William Harris
Qualified charitable distributions (QCDs) are a double-win: They allow individuals to reduce their tax bill and give to qualified charities.
If you are someone who has participated in QCDs in the past, you are likely wondering how the recently passed SECURE Act will affect your account and your ability to donate to your favorite charity. Here is what you need to know.
What are QCDs?
A QCD is a direct transfer from an IRA account to a qualified charity. Prior to the SECURE Act, IRA owners over the age of 70½ had a required minimum distribution (RMD) that they had to take each year.
Using a QCD, IRA owners can transfer up to $100,000 a year to qualified charities and count that donation as part of their required minimum distribution without having it count towards their gross income.
What is the SECURE Act?
As people continue to live longer and healthier lives, older Americans have been struggling not to outlive their assets. On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted into law to help prevent this situation. The SECURE Act was designed to help increase tax-advantaged accounts through various adjustments to the system, creating additional incentives and opportunities to invest in tax-advantaged accounts, while pushing back the RMD age from 70½ to 72. While this Act is helpful in many ways, it has impacted the use of QCDs.
Qualified Charitable Distributions Post-SECURE Act
There are two main aspects of the SECURE Act that are affecting QCDs:
1. The delayed RMD age from 70½ to age 72, and
2. Removing the contribution age limit with the added implementation of the "anti-abuse" clause.
Delayed RMD Age
First, by delaying the RMD to age 72, individuals who are age 70 ½ who would have used QCDs to help offset their RMD no longer have to do so. While they can still do a QCD, it doesn’t have the same benefits and would reduce an individual’s account value. Therefore, IRA owners are likely going to wait another year and a half, until age 72, to begin using QCDs.
Contribution Age Limit
Before the SECURE Act, IRA owners could no longer contribute to their account after age 70½. However, with many people continuing to work or receive income into their older age, this restriction has become outdated.
The SECURE Act’s removal of an age limit now means that IRA owners can contribute for as long as they like. However, regulations have been put in place to prevent people from contributing to the IRA and putting that same money into a QCD, or ‘double-dipping’ a tax advantage.
IRA expert Ed Slott offers this simplified example:
“You make a QCD in 2020 for $10,000. You also make a $7,000 deductible IRA contribution. Your charity receives the full $10,000, but the tax-free portion of the QCD reported on your tax return is reduced to $3,000. The remaining $7,000 of the QCD is taxable.”
In summary, the SECURE Act makes the use of QCDs more complicated, but it is still considered one of the most tax-efficient methods for charitable donations for those who do not itemize their tax return.
Speak with your financial adviser about how to properly handle QCDs to receive the best results for you and your charity.
About the author: William Harris
Bill Harris is a Retirement Management Advisor (RMA), a CERTIFIED FINANCIAL PLANNER™ practitioner (CFP) and a Master Elite Ed Slott Advisor. He is President of WH Cornerstone Investments, a financial advisory firm located in southeastern Massachusetts. Learn more at www.whcornerstone.com.