Advisors and donors have long utilized retirement funds as an effective asset for charitable giving, particularly for planned giving. While family members must pay income tax when withdrawing retirement funds, charities do not; giving retirement funds to a charitable organization results in an impactful gift and allows the donor to utilize other tax-wise assets for family. The 2019 Setting Every Community Up for Retirement Enhancement (SECURE Act) made several changes that could make charitable planning with retirement assets even more appealing.
1. Limitation of ability to utilize “Stretch IRA.” Prior to the SECURE Act, beneficiaries could choose to receive distributions throughout their lifetimes. The SECURE Act requires that IRA and other retirement account beneficiaries (other than spouses, minor children and some other exceptions) withdraw the entire fund balance within 10 years. In effect, this often increases the size of the IRA distributions and the resulting taxes on beneficiaries.
Charitable Giving Strategy: If you are already contemplating making a gift to charity, consider using retirement assets. Since charities do not have to pay taxes on IRA distributions, charitable gifts of retirement assets would allow other, more tax-wise assets to be given to family. You might consider designating a Donor Advised Fund, Designated Fund, or your local NCCF affiliate as the beneficiary of your IRA.
2. Required Minimum Distributions now begin at 72. The age at which you must begin taking RMDs has been increased from 70 ½ to 72 years, but you may still take qualified charitable distributions from your IRA when you reach 70 ½. Qualified charitable distributions are not taxable and do not count toward adjusted gross income.
What this means for you: During this 18-month window, clients who make qualified charitable distributions will provide support to nonprofits while simultaneously reducing the remaining amount in their IRA, future required minimum distributions and resulting taxes. While qualified charitable distributions cannot be directed to donor advised funds, a donor may consider making a cash gift to your local NCCF affiliate’s endowment, your favorite nonprofit organization or their endowment (see our full list of funds here), establish a designated fund to provide annual support to your favorite nonprofit organization, or start a scholarship endowment to support education in North Carolina.
3. Additional Contributions to IRAs. If you have earned income, you can now make additional contributions to IRAs after age 70 ½ - with no age limit.
What this means for you: While this may present an excellent planning opportunity, these contributions could have tax implications for individuals who also make qualified charitable distributions from their IRA. Any additional deductible IRA contributions made after reaching age 70 ½ will reduce, on a dollar-for-dollar basis, the amount of a qualified charitable distribution that can be excluded from the donor’s income. Instead, these amounts should be treated as income to the donor and qualify for a charitable deduction.
NCCF does not provide tax or legal advice. The information contained herein is for educational purposes and is not intended to be a substitute for individualized tax, legal, or investment advice.