New legislation designed to help make sure that you don’t outlive your assets in retirement has implications for charitable planning, including the popular IRA rollover or qualified charitable distribution gift.
The law does the following.
The official title of the legislation is Setting Every Community Up for Retirement Enhancement Act of 2019, or “the SECURE Act,” signed into law on December 20, 2019. Most of the provisions became effective on January 1, 2020.
For a large number of Americans, their retirement-plan accumulations plus personal savings will not be adequate for a financially secure retirement. This legislation takes a step towards addressing that problem by providing greater access to tax-advantaged retirement plans—helping to prevent older people from outliving their assets.
Many small businesses do not offer a retirement plan to employees because of the cost and complexity. The act simplifies the process and reduces the cost with a credit to employers who create a 401(k) or Simple IRA plan with automatic enrollment.
Under previous law, employers could generally exclude part-time employees (those who work less than 1,000 hours during the year) from enrollment in a company plan. The act makes it easier for part-time workers to participate.
Many health care workers could not contribute to a retirement plan because their compensation is not construed to be qualifying income. The act defines their income in a way that qualifies them for participation.
Students often graduate from college with a heavy debt burden, and sometimes money remains in a 529 account established for their education. The act allows usage of money in a 529 account to be used, up to $10,000 annually, for debt repayment of qualified student loans.
The act permits penalty-free withdrawals from retirement plans for a qualified birth or adoption distribution.
For liability reasons, it has been difficult to include annuities as an option in workplace plans. The act deals with the liability issue.
These are only some of the numerous provisions of the act. For more information about how you might be affected or about opportunities that may now be available to you, contact your employer or your tax and financial advisors.
Here are details on the three provisions that could affect charitable and general estate planning.
This applies to regular IRAs and also to certain other plans. However, a person who is enrolled in one of these other plans and is still working may be able to delay the mandatory distributions, subject to conditions of the plan.
Raising the age for the start of mandatory distributions came from the fact that people are living longer and retiring later. If you can invest your retirement funds on a tax-deferred basis for a longer time before starting withdrawals, there will be a larger accumulation for retirement needs.
Although the required minimum distribution date is now postponed to 72, provided you did not reach 70½ by the end of 2019, the SECURE Act did not change the age at which an individual can make a qualified charitable distribution from an IRA. That remains at 70 and one half. If you have an IRA and you are at least 70 and one half, you can authorize your IRA administrator to transfer from your IRA up to $100,000 to one or more charities—known as the IRA rollover or a qualified charitable distribution. The $100,000 refers to the cumulative amount to all charities combined and all IRAs combined. The amount you transfer will not be included in your taxable income, and it will count towards your required minimum distribution (once you reach the age of 72). Many individuals who are required to take money from their IRAs but do not need it for living expenses have chosen to make qualified charitable distribution gifts.
Because the minimum age for a tax-free charitable gift from your IRA remains at 70 and one half but the required minimum distribution age is 72 for those who did not reach 70 and one half by the end 2019, it is possible that there will be a brief period of time when a donor’s IRA gift is tax-free but does not count towards the minimum distribution requirement.
Previously, contributing to a regular IRA after the age of 70 and one half was not permitted. Based on circumstances, it was possible to contribute to certain other plans after the age of 70 and one half but not to a regular IRA. Now, so long as a person is working and has income, that person can continue contributing to an IRA. However, contributions to an IRA after the age of 70 and one half will reduce qualified charitable distributions by the cumulative amount of those contributions that have not already been used to offset earlier required minimum distributions.
If you do not make contributions to your IRA after the age of 70 and one half, then every dollar given through a qualified charitable distribution from your IRA will reduce your mandatory distribution requirement by a dollar.
The distributions can no longer be stretched over the life expectancy of the beneficiary. Examples of exceptions to the rule would be a beneficiary who is disabled, a minor child, or a beneficiary who is ten years or less younger than the account owner. Because the distribution period is shorter, the distributions will be larger and thus likely taxed at a higher rate. It would still be possible to arrange life payments with a charitable remainder trust.
Associate Vice President for Development
Marian H. Rochelle Gateway Center
307-766-4259 | bbefus@uwyo.edu
