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What You Need to Know about the SECURE Act

Heaton Smith Group
Published:  03/25/2020

This post is part of our special series on fundraising during crisis and represents the opinions of an AHP affiliate.

 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act includes three important changes that govern qualified retirement plans, including IRAs, 401(k)s, and 401(3)(b)s.   

Firstly, the age requirement for Required Minimum Distributions (RMDs) increased from 70 ½ to 72. The new law applies to individuals who turn 70 ½ on or after 1 January 2020. Therefore, account owners have another year and a half to take RMDs.  

Secondly, account owners my make additional contributions to an IRA during the mandatory withdrawal phase as long as they continue to work and have earned income. Previously, account owners could not make additional contributions to an IRA once they reached 70 ½.  

Thirdly, the “stretch” IRA for most non-spousal beneficiaries has been eliminated. This is a significant change to inherited IRAs. 

Effective January 1, 2020, most non-spousal beneficiaries of inherited IRAs must withdraw all funds within 10 years of the original account owner’s death. Therefore, non-spousal beneficiaries can no longer take required minimum deductions (RMDs) based on their life expectancies. Moreover, these accounts are no longer governed by RMD rules. A beneficiary may take annual distributions for 10 years, one every five years, or wait until the tenth year to withdraw all funds in the IRA.  

The no-RMD provision for non-spousal beneficiaries in the SECURE Act will allow these beneficiaries to manage their income during the 10-year period. A beneficiary may take additional income from an inherited IRA during a year when his/her income declines or an unexpected need arises. Importantly, one may also forego income during a high-income year or period of years. The no-RMD provision provides income flexibility not previously available, but all funds in an inherited IRA must be withdrawn within 10 years’ time.  

All IRAs inherited on December 31, 2019, or earlier are governed by the old laws. Surviving spouses may still roll over a deceased spouse’s account into their IRA and thus delay RMDs until age 72.  

Exceptions to RMD Changes

  • Surviving spouse
  • Children under the age of majority – state specific – aged 18-21
  • Disabled or chronically ill beneficiary
  • Individual not more than 10 years younger than deceased account owner 

The SECURE Act and Qualified Charitable Distributions (QCDs) 

The account owner must be at least 70½ at time of a gift, and a qualified charitable distribution (QCD, also known as a charitable IRA rollover) must be made directly from the IRA administrator to a charity or group of charities. Note that the QCD age requirement did not change, and $100,000 remains the maximum annual gift amount. Simply put, the QCD and RMD ages no longer mirror each other, and this may confuse some donors.  

Anti-Abuse Provision 

Since the SECURE Act allows additional deductible contributions to a traditional IRA for owners aged 70½ and older who have earned income, the new law does not allow one to effectively turn additional deductible IRA contributions into QCDs and thus “double-dip” from a tax perspective. For donors who make additional deductible contributions to a traditional IRA and also make QCDs from that IRA, the new rule limits the portion of the QCD that would be excluded as income.  

Example One 

Mary, aged 72, continues to work and makes deductible contributions to her traditional IRA in the amount of $4,000 for two consecutive years, totaling $8,000. At age 74, she makes a QCD in the amount of $20,000. Mary’s tax-free portion of the QCD would be $12,000. The $20,000 QCD is offset by the $8,000 of deductible contributions to her traditional IRA. Put simply, traditional IRA owners who have earned income after age 70½ and make deductible contributions to their account will have the aggregate of those additional contributions deducted from any future QCDs. This new rule effectively makes part or all of future QCDs taxable.  

Example Two 

Walter, aged 72, continues to work and makes $6,000 deductible contributions to his traditional IRA for the next four years, totaling $24,000. In the fourth year, Walter also makes a $25,000 QCD directly from his IRA to his favorite charities. Therefore, Walter is allowed a $1,000 tax-free QCD and the remaining $24,000 must be reported as income.  

Key Point 

Very few donors will be impacted by offsets to QCDs by single or aggregate deductible contributions to traditional IRAs during the RMD phase. More trailing baby boomers may work into their seventies than leading boomers, but it is important to understand this anti-abuse provision in the SECURE Act. Gift officers may be unaware that a donor in the mandatory RMD phase continues to make deductible contributions to his/her IRA. Therefore, for donors who continue to work into their 70s and plan to make a QCD, one would be wise to address this issue and ask them to seek counsel from their CPA or other tax advisor to avoid surprises.  

How the SECURE Act May Impact Fundraising

The 10-year withdrawal requirement for inherited IRAs may encourage donors with multi-six-, seven-, and multi-seven-figure IRAs to consider gifting a larger percentage (or all) of their IRA to charity. In particular, donors with a spendthrift heir may not want to give them access to a large amount of money via a large inherited IRA. 

Retirement account balances have the potential to increase with an extra 1½ years of tax-free growth. Moreover, donors who have earned income and make additional contributions to their traditional IRAs post age 70½ may have larger balances in their IRAs. Simply put, a larger IRA balance equates to a larger gift to charity. 

Donors' interests in testamentary charitable remainder trusts and charitable gift annuities may increase due to the 10-year withdrawal requirement. Since the average IRA balance for individuals aged 65-74 is approximately $358,000, the testamentary charitable remainder trust option will, in most cases, appeal to donors with much larger balances. The aforementioned average IRA balance is the balance at or near the RMD phase and will likely decline as donors approach their life expectancy. Moreover, donors who may consider this option would likely have concerns regarding a spendthrift heir. The donor fact pattern for a testamentary charitable remainder trust is rare and quite specific, and this option must be weighed against a donor’s goal for the timing and impact of their gift to a charity.

Knowledge of the SECURE Act will give you an opportunity to build additional trust with your donors. While gift officers must refrain from practicing law or providing tax advice, one’s ability to be conversant on the SECURE Act with respect to the points outlined above may deepen your relationship with donors and thus get you a seat at their respective planning tables in the future. 

Disclaimer: Heaton Smith does not provide legal, tax, or financial advice. Always instruct donors to source legal, tax, or financial advice from one or more of their advisors with regard to gift and estate planning matters. This communication is not intended to be used, and cannot be used, for the purpose of avoiding tax-related penalties.  

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Meet The Author

heaton smith group
Heaton Smith Group

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