Tax Advantaged Giving and the Impact of the SECURE Act

By Judi Tichenor, executive director, Office of Gift Planning

In a nutshell, what is the SECURE Act?

The SECURE Act - as certain provisions became known under the Further Consolidated Appropriations Act - was signed into federal law on Dec. 20, 2019. The Act deals with changes in retirement plan contributions, retirement plan distributions and inherited IRAs.

How has the Act affected IRA contributions?

Before the SECURE Act, individuals 70 1/2 years or older could no longer make contributions to traditional IRAs. Now, individuals age 70 1/2 who have earned income and their nonworking spouse can make IRA contributions beyond that age. The key here is that the income must have been earned. The Internal Revenue Service defines earned income as income that is derived from:

•Wages, salaries, tips, etc.
•Commissions or professional fees
•Self-employment income
•Nontaxable combat pay

Has the Act affected required distributions?

Yes, prior to the SECURE Act, one had to begin taking required minimum distributions (RMDs) at the age of 70 1/2. The minimum age for RMDs has now been shifted up to age 72 for those who turn 70 1/2 after Dec. 31, 2019.

What happened to the "stretch distribution" rule?

Before the SECURE Act, a non-spouse beneficiary who inherited an IRA could "stretch" distributions from that IRA over their lifetime, thus reducing the impact of income taxes. With a few limited exceptions, the Act has now shortened that time period to just 10 years for those who inherit an IRA after Dec. 31, 2019. Example: James named his daughter Maya as beneficiary to his IRA, and she just inherited it at his passing on Jan. 12, 2020. Maya used to be able to take minimum required distributions over her lifetime, but now with the SECURE Act, she must take all of her distributions from James's IRA within 10 years of Jan. 12, 2020.

Here's a gift planning tip: James can set up a charitable remainder trust with Rice University's trust company, Rice Trust Inc., as trustee, and name the trust as the beneficiary of his IRA. Upon his passing, the IRA assets will be distributed into the trust, and the trust will begin to pay Maya payments every year for the rest of her life or for a term of up to 20 years, whichever James preferred when he set up the trust. James's estate will get a charitable tax deduction from the trust, and Maya will enjoy the tax benefits of having her payments spread out for a period much longer than 10 years. Assets in the trust continue to grow tax-free until distributed to Maya.

Can I still make IRA charitable rollover gifts?

Yes. You can make IRA rollover gifts (also called "Qualified Charitable Distributions") starting at 70 1/2 years of age for up to an annual maximum of $105,000.

What if I give an IRA charitable rollover gift and then make a tax-deferred contribution to my traditional IRA in the same year?

With the passage of the SECURE Act, IRA account owners must now reduce their qualified charitable distribution treatment of IRA charitable rollovers by any contribution amounts made into their traditional IRAs after age 70 1/2, to the extent they have not already done so in a prior year, on a last-in-first-out basis. IRA regulations on the exact methodology are expected. Example: In January 2020, Gina (age 71) makes qualified charitable distributions to Rice and other public charities from her traditional IRA in the total amount of $105,000. In July 2020, she contributes $7,000 of her earned income that year to the same traditional IRA. The amount that she may treat as a qualified charitable distribution for 2020 is $93,000 ($105,000 reduced by $7,000).

Your Rice gift planning team recommends you always consult with your own professional advisor to understand how changes in tax law affect your own personal financial, charitable and tax plans. We are always happy to meet with you and your advisor to assist in any way we can. For more information about the SECURE Act, charitable remainder trusts or charitable gift planning in support of Rice, please call us at 713-348-4624, or email us at [email protected] .