The SECURE Act became law in January 2020. It stands for Setting Every Community Up for Retirement Enhancement, which means it changes some of the rules to our retirement accounts. We at Perkins Thompson are ready to review how the SECURE Act affects your estate plan. This writing discusses the strategy to make charitable gifts from a traditional IRA. There are other facets to the SECURE Act that we will continue to address.
One of the changes under the SECURE Act is the rule that inherited IRAs must be withdrawn within 10 years, unless the beneficiary falls within an exception such as being a surviving spouse, minor child or disabled individual. So, what does this have to do with charitable giving?
The SECURE Act also preserved the ability to make Qualified Charitable Distributions (QCDs). So, a strategy to bring down the taxable value of an IRA is to make QCDs while alive. The QCD is not a tax deduction, but neither is it included as income for income tax purposes. And, the QCD can satisfy all or part of your Required Minimum Distribution.
First, a Qualified Charitable Distribution can only be made from an IRA. These rules do not apply to a 401(k) or 403(b).
So, if you’re interested in using IRA funds to make charitable gifts, make certain you satisfy this checklist:
- The donor must be 70 1/2.
- The source must be an IRA, not a 401(k) or 403(b).
- The payment must go directly from the IRA to the charity. Do not put the funds in your bank account in the interim.
- The charity must be a qualifying public charity. This does not include private foundations, donor-advised funds, or “friends of …” organizations.
- The donor cannot receive a personal benefit, such as a dinner, ballgame, souvenir hat, etc.
- The charity must send the donor a letter stating that the donor did not receive a benefit.
The SECURE Act also removed the age limit on when you can make tax-deductible contributions to a traditional IRA. So, the Act incorporated an anti-abuse provision that prevents individuals from making tax-deductible contributions to traditional IRAs, and then making Qualified Charitable Distributions. If you plan to make post-70 1/2 contributions while also making charitable gifts, you should consult with a professional familiar with the SECURE Act.
For further information:
The attorneys at Maine Center for Elder Law, a Practice of Perkin Thompson, are available to assist with your questions. We can be reached at (207) 467-3301 or (207) 774-2635.