Charitable giving in retirement years is a tax-efficient way to support the causes donors care most about. The Secure (Setting Every Community Up for Retirement Enhancement) Act 2.0 of 2022, which President Biden signed on December 29, brings impactful changes to retirement planning and encourages charitable giving.
As retirees think about their charitable giving strategies in 2023 and beyond, there are a few updates to be aware of in the Secure Act 2.0.
If you are at least 70.5 years old, a savvy strategy known as a qualified charitable distribution (QCD) involves a direct transfer from an IRA to an eligible charity. QCDs can be counted toward satisfying the required minimum distributions (RMDs) for the year. Typically, RMD’s count as taxable income, and that income could potentially reduce your eligibility for certain tax deductions and credits.
For a charitably inclined investor, a QCD strategy can be highly effective since it will prevent or lessen the impact of RMD income. In addition, a QCD allows a donor to receive a tax benefit from a charitable contribution even if the donor doesn’t itemize deductions. This provides the donor an additional way to make a significant philanthropic gift other than donating cash or assets.
Update 1: QCDs can be made to split-interest entities
Beginning in 2023 with the provision to Section 307 of the Secure Act 2.0, taxpayers can take advantage of making a QCD of up to $50,000 to fund a split-interest entity (charitable remainder trust or charitable gift annuity) and make a one-time election to treat the contributions as if they were qualified charitable distributions made directly to a charitable entity.
Contributions to a split-interest entity benefit not only the charity but also the individual IRA owner. A split-interest entity can generate an income stream to the individual IRA owner for a selected term of years, not exceeding 20 years, or for their lifetime. This gives the donor the ability to be philanthropic while at the same time providing an income stream during retirement years.
Update 2: QCD limit will be indexed for inflation
The other update of Section 307 is that the annual QCD amount will now be increased for inflation. Prior to this extension, the maximum yearly QCD amount was limited to $100,000. Beginning in 2024, the QCD limit will now be indexed for inflation.
Update 3: Required age will increase for minimum distributions from an IRA
Lastly, another critical key point of the Secure Act 2.0 is that although the age individuals can start taking QCDs is staying at 70.5, the age for required minimum distributions (RMD) from an IRA will rise from 72 to 73 in 2023 and then to 75 in 2033.
For those who are charitably inclined, QCDs can offer a smart strategy to enhance giving and achieve greater tax savings. Planned giving can be complex. Reach out to one of our specialists to further discuss the possible charitable options.
Additional guidance on the Secure Act 2.0 will be released by the IRS and posted to this website.
