How Changes in the SECURE Act Affect Qualified Charitable Distributions

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Many individuals use qualified charitable distributions to divest their surplus Traditional IRA assets. Using this strategy, those who want to avoid taxation on their taxable retirement plan assets are able to do so by donating them to charity; qualified charitable distributions are available to individuals after the age of 70 ½. These distributions must be paid directly to a charitable institution to eliminate taxation on the distribution. $100,000 is the maximum amount annually allowed per taxpayer.

The SECURE Act has eliminated the age cut-off restricting individuals from making contributions to their Traditional IRAs after the age of 70 ½. This change allows anyone who is able to make a Traditional IRA contribution if they have earned income. Individuals may even use the contribution as a tax deduction if they qualify.

With these two provisions, the IRS recently published guidance on how a deductible contribution to a Traditional IRA made postage 70 ½ and a qualified charitable distribution affect each other. Deductible Traditional IRA contributions made at age 70 ½ and older will reduce the individual’s eligibility for qualified charitable distributions.

An Example of How It Works

The following example was provided in IRS Notice 2020-68.

An individual who turned age 70 ½ before 2020 deducts $5,000 for contributions for each of 2020 and 2021 but makes no contribution for 2022. The individual makes no qualified charitable distributions for 2020 and makes qualified charitable distributions of $6,000 for 2021 and $6,500 for 2022.

(a) The excludable amount of qualified charitable distributions for 2021 is the $6,000 of qualified charitable distributions reduced by the $10,000 aggregate amount of post-age 70 ½ contributions for 2021 and earlier taxable years. For this individual, these amounts are $5,000 for each of 2020 and 2021, resulting in no excludable amount of qualified charitable distributions for 2021 (that is, $6,000 - $10,000 = ($4,000)).

(b) The excludable amount of the qualified charitable distributions for 2022 is the $6,500 of qualified charitable distributions reduced by the portion of the $10,000 aggregate amount of post-age 70 ½ contributions deducted that did not reduce the excludable portion of the qualified charitable distributions for earlier taxable years. Thus, $6,000 of the aggregate amount of post-age 70 ½ contributions deducted does not apply for 2022 because that amount has reduced the excludable amount of qualified charitable distributions for 2021.

The remaining $4,000 of the aggregate amount of post-age 70 ½ contributions deducted reduces the excludable amount of any qualified charitable distributions for subsequent taxable years. Accordingly, the excludable amount of the qualified charitable distributions for 2022 is $2,500 ($6,500 - $4,000 = $2,500).

(c) As described above, because the $4,000 amount reduced the excludable amount of qualified charitable distributions for 2022, that $4,000 amount does not apply again in later years, and no amount of post-age 70 ½ contributions remains to reduce the excludable amount of qualified charitable distributions for subsequent taxable years.

If you have passed the age of 70 ½, and you’re planning on making a contribution and a qualified charitable distribution in the same year, you may want to consider checking with your tax or legal advisor.