Congress has passed legislation benefitting savers who have Individual Retirement Accounts (IRAs) and other qualified retirement plans. This legislation improves some of the goodies contained in the original SECURE Act passed at the end of 2019.
The original SECURE Act changed the “required beginning date”, the age at which required minimum distributions (RMDs) from IRAs and certain other qualified plans must commence, from April 1 of the year after attaining age 70 1/2 to April 1 of the year after attaining age 72. This meant that persons born in the first half of 1951 were able to wait two years before taking their first distribution. SECURE 2.0 raises the age to 73 for 2023 (and to age 75, ten years later). Under the new law, IRA owners born in 1951 can wait until April 1, 2025 to commence their RMDs, while those born in the first half of 1950 had a required beginning date of April 1, 2021. Many taxpayers should choose to take their distribution in the year they turn 73 (rather than wait until the following April 1) so that they do not have to take two distributions in the same year, which could result in some income being taxed in a higher tax bracket.
Qualified Charitable Distributions from IRAs
Taxpayers who have attained age 70 ½ are permitted to make Qualified Charitable Distributions (QCDs) from their IRAs of up to $100,000 each calendar year. The distribution must go directly from the IRA to eligible charitable organization. Donor-advised funds, supporting organizations and private foundations are not eligible. The QCDs are reported to the IRS, but are excluded from income and not taken as a deduction. The age for making QCDs has remained at age 70 1/2, even though the required beginning date for IRA distributions has been changed to age 73 in 2023.
Taxpayers who take the standard deduction (rather than itemizing) can benefit from making QCDs prior to their required beginning date. The standard deduction for a married couple filing jointly in 2023 is $27,700. If that couple had $10,000 of itemized deductions other than charitable contributions, they could only receive a $600 federal income tax deduction from any charitable contributions unless the charitable contributions exceeded $17,700. QCDs would reduce the value of what would ultimately be taxed when distributed from the IRA.
However, taxpayers who itemize their deductions should most likely choose not to make QCDs in the three years prior to their required beginning date. These QCDs would not result in any current tax savings since no IRA distribution is required until the year the IRA owner turns 73. There would be a benefit in that future years’ RMDs will be smaller. But taxpayers who make the charitable contributions from their own funds will get an immediate tax benefit from the tax-deductible contributions rather than receiving the tax benefit of the QCD over their lifetime plus ten years as the IRA is distributed.
Once RMDs commence, the decision as to whether to make QCDs in place of direct contributions to charity becomes much more complicated. QCDs should be used by most charitably minded seniors unless they could receive a greater tax benefit from a gift of substantially appreciated long-term capital gains property. Each taxpayer must look at their personal tax situation and compare the benefit of the two approaches to charitable giving.
This information is provided for informational purposes only and should not be construed as legal or tax advice. Readers are encouraged to consult an attorney or tax professional regarding their specific legal or tax situation.