What You Need to Know About the SECURE Act

  • Published January 22, 2021
  • / By Meaghan Hogan

Many of us became familiar last year with the provisions of the CARES Act, which Congress passed in March of 2020 to alleviate the impacts of the Covid-19 pandemic. That law contained some favorable provisions for charitable giving that we got to know. While Congress renewed some of its provisions related to giving for 2021, those may still disappear by next year. 

The SECURE Act, which was passed in December 2019, received less notice, probably because the pandemic hit soon after its passage.   Unlike the CARES Act, the SECURE Act is still in effect and may have a longer-term impact on charitable giving.  Here’s what you need to know.

Impact on Qualified Charitable Distributions (QCDs)[1]: The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement Act, modifies some aspects of the way that individual retirement accounts (IRAs) work.  First, the law pushed back the age at which individuals must start to take required minimum distributions (RMDs) from age 70 ½ to age 72.  Individuals can still make qualified charitable distributions starting at age 70 ½ even if they are not taking RMDs at that time.

Another change that the SECURE Act made relates to IRA contributions and the QCD amount.  Under prior law, people age 70 ½ and older could not make new contributions to an IRA.  The SECURE Act changed that.  Now, IRA owners may make contributions to their accounts, the amounts of which may be tax deductible, at any age.  Such contributions, though, will reduce the tax-free $100,000 QCD limit.

IRA expert Ed Slott offers the example of a donor who makes a QCD of $10,000 in 2020 and also contributes $7,000 to her IRA.  The charity receives the full $10,000, but the tax-free portion of the QCD is reduced to $3,000.  The remaining $7,000 is taxable.[2]

How many donors will face this issue?  This new rule seems as though it could be tricky for donors to navigate. But will it come up often?

Some might argue that IRA owners who contribute to their accounts after age 70 ½ will simply receive those contributions back in a few years in the form of mandatory RMDs.  In addition, assets in an older accountholder’s IRA will have less time to grow tax-free, so the option to add to an IRA may not be as attractive as in younger years.  For these reasons, it is possible that not many IRA owners will address this issue.

In addition, fewer donors itemize their taxes since the 2017 tax act passed.  Before the passage of that law, which increased the standard deduction amounts, about 30% of taxpayers itemized their deductions.  In 2018, the first year after the law was passed, only 10% of taxpayers itemized their taxes.[3]  So, QCDs may still offer the advantage of allowing a charitable deduction for those who do not itemize by excluding the gift amount from taxable income.

There is one reason, however, that some IRA owners may have to deal with the tax ramifications of making contributions to an IRA after age 70.  According to the U.S. Census bureau, the percentage of Americans in their 70s who are working has risen in the past 20 years from less than 10% to almost 15%. [4] There two main, contrasting reasons for this: some Americans feel financially secure but want to stay engaged by remaining in the workforce, while others do not have savings and need to work.  Of those older workers who can and want to save, it is possible that they will put earnings into their retirement accounts.  Thus, it is hard to predict whether and how many taxpayers will have to work through the tax ramifications of making a QCD AND a contribution to an IRA.

The upshot: Continue to market QCDs.  Donors continued to make these gifts in 2020 even though the CARES Act had eliminated the RMD requirement.  It appears they have become a familiar and useful tool for charitable giving.

Do: Be sure that your marketing materials are annotated to note that the SECURE Act made changes to the rules regarding RMDs, IRA contributions, and dollar limits on QCDs and that donors should check with their advisors to determine how those changes may affect them.  If donors have further questions for you, direct them to speak with their advisors.

CRTs may replace the “stretch” IRA:  Previously, IRA beneficiaries other than the account owner’s spouse could withdraw account proceeds over their life expectancy as estimated by IRS tables.  This was known as a “stretch” IRA- the account could be distributed over the beneficiary’s lifetime, stretching out the time over which taxes are due, possibly reducing the beneficiary’s tax bracket, and allowing more time for tax-deferred growth.

The SECURE Act now requires most nonspouse beneficiaries to withdraw account assets within 10 years of the account owner’s passing.  As a result, the advantages described above may be limited for beneficiaries with a life expectancy much longer than 10 years.

Enter the CRT.  Individuals who want to replicate the effect of the stretch IRA may consider a charitable remainder trust.  An IRA can be distributed to a CRT after the account holder’s passing.  The proceeds can then be distributed to the beneficiary over their lifetime or for a term of up to 20 years.

What does this mean? CRTs are often created in response to advisors’ recommendations- oftentimes, by an accountant staring down a client’s potential long-term capital gains taxes.  So charities may be contacted by an advisor to learn their receptiveness to being a remainder beneficiary, and may even be asked whether they might serve as trustee.

Along with possible tax and financial planning benefits, donors may want to create a CRT with IRA proceeds for other reasons.  In estate planning, it is common that individuals want to protect younger beneficiaries from themselves, creating trusts as a way to distribute principal over time, rather than all at once.  They may also want to support younger beneficiaries, like grandchildren, during their early adult years, when a trust payment can help with things like paying for college or purchasing a home.  For these individuals, a stretch CRT designed to pay for a term of years may be a good solution.

But do we want it?  Some commentators have suggested that a CRT whose benefits do not reach the charity for several years’ time are not beneficial.  This does not make sense.  Charities do not have to spend much if any money to receive the remainder of a CRT, unless they act as trustee.  Even then, there may not be huge cost if they already have that capability.  And the results can still be beneficial.

Using an example provided by Wells Fargo, a $1M IRA placed in a charitable remainder unitrust, assuming a net 7% growth rate and a 9.86% payout rate, could result in a $351,000 gift to charity in 35 years.  Using the same net growth rate, I calculated the present value of that charitable remainder to be roughly $32,875.

Given that most charities would be pleased to accept a gift of this amount, doing the same in a few dozen years hardly seems like a hardship.  In addition, the payout rate in this example is aggressive. If the rate were set lower, the benefit to charity may be greater.

The Upshot: Respond to inquiries about this gift idea and discuss whether you will act as a trustee for this type of trust.  At the least, you may learn about a new or existing donor’s interest in sustaining your charity in the long term.  While you should continue to prioritize beneficiary designation and charitable bequest gifts, you may consider whether and how a simple message about this option can be added to marketing.

[1] Some readers may also know these gifts by the name, “IRA charitable rollovers” or something similar.

[2] https://www.kiplinger.com/article/retirement/t054-c000-s004-secure-act-changes-squeeze-qcds.html

[3] https://www.morningstar.com/articles/983262/rmds-arent-required-for-2020-what-should-you-do

[4] “The Number of Americans Working in Their 70s is Skyrocketing,” at: https://qz.com/work/1632602/the-number-of-americans-working-in-their-70s-is-skyrocketing/