SECURE 2.0’s New Rule On IRAs And Charity Can Really Pay Off

A new rule under SECURE 2.0 creates a great opportunity for IRA owners 70 ½ or older with charitable inclinations to get a prospective valuable tax benefit and keep cash flow. The current law allows a charitable distribution from an IRA for individuals age 70 ½ or older (irrespective of the new Required Minimum Distribution of age 73) to make a distribution of up to $100,000 a year directly to a qualified charity. This is called a Qualified Charitable Distribution, or QCD, and they are fantastic opportunities on their own. Now, SECURE 2.0 has introduced a provision that allows a ‘split-interest’ gift, which gives the IRA owner a tax break and provides continuing cash flow.

Why a QCD is a great idea. QCDs have a lot of advantages over a conventional charitable deduction.

1. A QCD is eliminated from income, and not treated as an itemized deduction. Thus, a donor can use the standard deduction or other itemized deduction and have the QCD removed from their Adjusted Gross Income (AGI).

2. QCDs are not subject to the charitable deduction income limits.

3. Because the QCD is not included in income, there is no tax on the entire QCD.

4. Further, the QCD reduces AGI, which also reduces various ‘floors’ like the income adjustment to compute the taxability of Social Secuirty benefits.

5. The QCD, reduces the income used to determine the Medicare Surcharge on Parts B and D, called the IRMAA limits.

6. In most states, QCDs are exempt from state income taxes as well. (New Jersey, for example, is an exception, since it taxes Gross income)

QCDs are generally better from an income tax standpoint: lower income, lower taxes, and lower floors.

New Rules. Under SECURE 2.0, two new rules apply to QCDs. First, the $100,000 annual limit is now indexed for inflation, which means that the QCD can be larger. This provision will be in effect in 2024. Second, and even more interesting is the new rule allowing the one-time use of a QCD to fund a split-interest gift, like a Charitable Gift Annuity (CGA), Charitable Remainder Annuity Trust (CRAT), or Charitable Remainder Unitrust (CRUT). These options share the remarkable feature of removing a significant portion of income while retaining a cash flow from the gift. It is likely that the most attractive candidate for this treatment would be a Charitable Gift Annuity since CRATs and CRUTs come with some cumbersome legal and administrative costs. A CGA provides lifetime income to the donor (and specifically the spouse) and at the end of the lifetime of the donor(s), the charity keeps the funds.

For the CGA (or Trust) to qualify:

• It must be funded from a QCD
• Maximum is $50,000 per IRA owner
• Cannot be assignable
• Income can only go to the IRA owner and/or spouse
• All income from the CGA is ordinary income
• It has to provide at least 5% to the recipients

Example: Helen and Joel are both age 75 and have significant RMDs each year from their IRAs of $60,000. They have other income of $80,000 a year, which includes $50,000 of Social Security. They are including 85% of their Social Security in their taxable income and are in the 22% tax bracket for 2023. Their projected federal tax liability for 2023 would be about $13,671. They had intended to give at least $100,000 of their IRAs to charity on their death. If they use the QCD approach with a CGA, they would each donate $50,000 from their IRAs to a CGA at their favorite charity. They could receive, based on IRS rates, about 5.8% from the CGA ($5,800 a year). At the time of the final spouse’s death, the charity would get the remainder of the $100,000. Their federal taxes with the QCD would be about $4,936, or $8,735 less. The CGA would allow them to ‘have their cake and eat it too’ – meaning they would pay less taxes and still retain the income. The income could start the next year and would be included in their taxes. They’d still have RMDs, but they would be smaller, since the IRA was reduced by the QCD. CGA calculations are based on age and whether there are one or two spouses being considered.

What charities are thinking. The use of CGAs and other split interests opens a new window for charities, who can now work with a wider range of potential QCD donors. Kathy Dickens, executive director of the Four County Community Foundation in Almont, MI is excited by the prospect of a new wave of donors. “We’ve always had a solid donor base but being able to offer a Charitable Gift Annuity to QCD donors will give them a continuing current income stream, plus fulfill their charitable intent. We’re looking forward to the new donor opportunities.” Dickens added that community foundations can give a donor input into the direction of donations without running afoul of the prohibition on using QCD for a Donor Advised Fund.

The fine print. Some things to know:

• You must be at least 70½ years old
• Funds must be transferred directly from your IRA custodian to the qualified charity.
• The maximum annual distribution amount that can qualify for a QCD is $100,000 a year. The maximum for a CGA or split interest gift is $50,000 and can only be done once. Spouses could each do QCD strategies if they had ample IRA assets.
• Certain charities are not eligible to receive QCDs, including donor-advised funds, private foundations, and supporting organizations.
• Contributing to an IRA may result in a reduction of the QCD amount you can deduct.
• The CGA has to commence payment of 5% or more no later than one year from the date of funding.
• The CGA can only go to the IRA holder and/or spouse.

Bottom Line. If you are 70 ½ or older and have may want to leave part of your IRA to charity, consider the new split-interest Qualified Charitable Distribution. You can reduce your tax liability and benefit from continuing cash flow. As always, I’ll try to answer questions: llabrecque@sequoia-financial.com.