Expanded Opportunities for Charitable Giving with Retirement Assets
Retirement plan assets (other than Roth IRAs) are among the most “tax heavy” assets people own because distributions from retirement plans are fully taxed at ordinary income rates. Estate planners commonly advise their clients to fulfill charitable gifts with retirement plan assets, as that can reduce both estate taxes and income taxes that heirs would otherwise have to bear. This advice is all the more vital following passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which eliminated the ability to leave retirement assets to heirs (other than a spouse) in a way that would allow them to defer that income tax burden by “stretching” required distributions over the heirs’ lifetimes. Now, all retirement assets must generally be distributed within 10 years, with each distribution taxable to the beneficiaries.
Since passage of the SECURE Act, advisors have increasingly urged retirement plan owners to use these assets to satisfy their charitable bequests, or perhaps contribute them to “split interest” vehicles such as charitable remainder trusts, which can allow for annual payments to heirs in a way that spreads out the income tax burden on them while leaving a legacy to charity in the form of a remainder interest. With respect to lifetime gifts, since 2006, retirement plan owners who are at least age 70½ have had the ability to give up to $100,000 per year to charities directly from their IRAs as qualified charitable distributions (QCDs). Those QCDs count toward a plan owner’s required minimum distribution (RMD) amount and are not included in the plan owner’s taxable income at all.
SECURE Act 2.0
By way of the SECURE Act 2.0, enacted at the end of 2022, Congress expanded a plan owner’s ability to use QCDs to combine tax savings with philanthropy.
First, Congress added an inflation adjustment to the $100,000 QCD limit starting in 2024. In addition, Congress added a brand-new mechanism allowing people to make a QCD not just outright to charity but also to certain “life income” charitable vehicles, including charitable gift annuities (CGAs) and charitable remainder trusts (CRTs).
Each plan owner can make a QCD to a life income charitable vehicle of up to $50,000 per lifetime (not annually). The hope is that Congress will expand the $50,000 lifetime cap in the future. So how does this new ability to give up to $50,000 to charity and receive annual payments in exchange operate? Below is a brief overview of these life income charitable vehicles generally and how they would work with QCD contributions under the new rules.