By Thomas Neal Tillery
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was signed into law on December 20, 2019 and became effective January 1, 2020. The act packaged together several changes intended to improve retirement security for “every community.” Some of the key points are:
- The age limit restriction for contributions to an IRA has been removed.
- The required minimum distribution (RMD) age, previously age 70 ½, was increased to age 72.
- Long-term, part-time, employees are now eligible to participate in 401(k) plans.
- Most distributions from an inherited retirement account must now be taken within a 10-year period.
Heart of the matter
The elimination of an age cap for contributions to individual retirement accounts is an acknowledgement that Americans are working longer and can continue to make contributions into an IRA beyond age 70 ½. Another change raised the age for when individuals need to begin taking RMDs from tax-deferred accounts, such as 401(k) plans and IRAs, to age 72 from age 70 ½. Note, there is a great deal of age 70 ½ changes going on in this paragraph. However, one of the age 70 ½ rules did not change, and this absence of change has created some consternation.
The SECURE Act made no change to the age at which Qualified Charitable Distributions (QCDs) may be made. The age when an individual can make a QCD continues to be age 70½.
QCDs are tax-efficient methods of making charitable donations with funds from an IRA. An account owner age 70 ½, or older, can transfer up to $100,000 directly to charity each year. The distribution from the account can fulfill the account owner’s annual RMD (now beginning at age 72), and it is not included in Adjusted Gross Income (AGI). As a result, it is not counted as a charitable gift for the purpose of itemized deductions.
A new rule under the Secure Act now limits the amount of QCDs an IRA account owner can make. This limitation is based on the cumulative amount of post age 70 ½ deductible contributions to the IRA. It may be presumed that this provision is intended to prevent an individual from deducting an IRA contribution, thereby, reducing their AGI, and then donating that contribution, on a pre-tax bases, as a QCD; especially in a situation where the taxpayer is not itemizing and would not otherwise be able to deduct a pre-tax charitable contribution.
Adam is age 75 and works part time at a local homeless shelter. The shelter is a qualified 501(c)(3) charity. He earns $3,000 per year, and as a result of the SECURE Act, he can contribute the entire $3,000 to an IRA for his benefit. He makes the contributions for five years and finally decides to retire at age 80. As a departing gift to the shelter he elects to make a QCD from his IRA to the shelter. The value of the IRA is $18,000. If the value of the IRA is $18,000, then $3,000 will be treated as a QCD and $15,000 taxed as ordinary income. The $15,000 is treated as a charitable contribution to the homeless shelter – subject to the standard deduction limitations.