SECURE ACT and SECURE 2.0 ACT: The effect on charitable giving
Retirement funds have long been an effective asset for charitable giving, particularly for planned giving. While family members must pay income tax when withdrawing funds, charities do not, so giving directly to nonprofits results in tax-advantaged impact.
The Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”), which became law in 2019, made charitable planning with retirement assets even more appealing. Now, the SECURE 2.0 Act (“SECURE 2.0”) signed into law in December 2022 builds upon the earlier Act and many of its provisions will impact the charitable sector. Charitable contributions may increase as retirement plan assets are now eligible for contribution to split-interest charitable vehicles as well as to nonprofits directly. Additionally, nonprofit organizations that offer employer retirement plans will be required to implement rule changes simplifying retirement plan administration and increasing retirement savings of employees.
Not every provision of SECURE 2.0 is effective for 2023; some are delayed until future years. This article focuses on the new rules that will affect charitable giving, but other provisions are also summarized, and effective dates noted.
- Changes for Qualified Charitable Distributions (“QCDs”)
Individuals 70 ½ years of age or older are permitted to give $100,000 per year directly to qualifying charities from their IRA and avoid recognition of income. Under SECURE 2.0, the $100,000 cap on QCD amounts will be indexed for inflation annually beginning in tax year 2024.
SECURE 2.0 further expands the QCD by allowing a one-time transfer of up to $50,000 to fund a split-interest vehicle, such as a charitable remainder unitrust (CRUT), charitable remainder annuity trust (CRAT) or an immediate charitable gift annuity (effective Jan 1, 2023). Couples may contribute up to $100,00 if funded by the IRAs of both spouses. The income beneficiaries of qualifying CRUTS or CRATs must be the IRA owner and their spouse, and payments must be established at a fixed rate of 5% or greater. A taxpayer may only make this transfer during a single tax year up to a maximum of $50,000. The $50,000 cap will be indexed for inflation for tax years after 2023.
What this means for you: Donors to charitable nonprofits can achieve all or some of three goals using a QCD: 1) their philanthropic inclination toward a particular charity or cause, 2) the RMD from their IRA, when 73 years old or older (see below), and 3) creation of a stream of income and tax-advantaged disposition of assets at death.
- Changes for Required Minimum Distributions (“RMDs”)
Required Minimum Distributions now begin at 73. Effective Jan 1, 2023, you must begin receiving RMDs at age 73 (instead of age 72) but you may still direct qualified charitable distributions from your IRA when you reach 70 ½. To be a qualified charitable distribution, the RMD must be paid directly to a 501(c)3 public charity. Qualified charitable distributions are not taxable and do not count toward your adjusted gross income.
What this means for you: Clients who make qualified charitable distributions will provide support to charities 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, they generally MAY be designated directly to public charities, including FFTC for the benefit of an FFTC Community Impact Fund, Designated Fund, Scholarship Fund or Field of Interest Fund.
- Additional Contributions to IRAs
Catch-up contributions allow people age 50 and older to set aside additional dollars to workplace retirement plans, such as IRAs, 401(k)s and 403(b)s. Starting in 2025, if you are age 60 to 63 (inclusive) the catch-up contribution amount is increased to the greater of $10,000 or 10% more than the regular catch-up amount. For SIMPLE plans, the limit on catch-contributions for the same group is the greater of $5,000 or 50% more than the regular catch-up. However, employees who make more than $145,000 per year (indexed for inflation), may only make catch-up contributions on an after-tax Roth basis.
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. 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.
- Limitations on the “Stretch IRA”
Under the 2019 SECURE Act, the “stretch IRA” was eliminated for most non-spouse beneficiaries effectively eliminating the option to receive distributions throughout their lifetimes. This strategy allowed beneficiaries to defer payment of taxes on a large portion of inheritance from taxes. The 2019 SECURE Act created a new ten-year rule which 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 distributions and the resulting taxes.
What this means for you: Since charities do not pay taxes on IRA distributions they receive, charitable gifts of retirement assets are strategic ways to reduce tax liability and support causes you care about. You might consider designating a charity – including an FFTC Donor Advised Fund, FFTC Designated Fund or FFTC Community Impact Fund – as the beneficiary of your IRA, while leaving other assets to family.
SECURE 2.0 contains almost 100 retirement provisions, many of which are beyond the scope of this article. For our nonprofit clients that sponsor retirement savings plans, we summarize a few changes to the existing rules. Nonprofits will want to consult with plan administrators to understand how the new rules will impact your organization.
- New 403(b) plans must automatically enroll eligible employees (effective Jan 1, 2025).
- Plans must distribute to participants at least one benefit statement on paper (rather than electronically) each year (effective Jan 1, 2026).
- Small employers, including nonprofit organizations may participate in Multiple Employer Plans (MEPs) to obtain more favorable retirement plan terms (effective Jan 1, 2023).
- For certain participants, age-based catch-up contributions must be Roth contributions (effective Jan 1, 2024).
- Employers may make matching contributions with respect to qualified student loan payments made by the participant (effective Jan 1, 2024).
- Employers may allow certain employees to make after-tax deferrals to emergency savings accounts (effective Dec 29, 2022) and participants may make limited early withdrawals, without incurring tax penalty, for certain emergency expenses (effective Jan 1, 2024).
The SECURE Act 2.0 opens the door for tax-exempt organizations to receive increased funding from certain charitable vehicles and provides new incentives for donors to make charitable donations from their IRAs in 2023 and beyond.
Our team would be happy to discuss these changes and how they may affect your charitable planning. Contact Robin Barefoot at firstname.lastname@example.org or 919.612.1629 for more information.
FFTC 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.