Take-Away: The SECURE Act created some confusion when it increased the required beginning date after which required minimum distributions will be taken to age 72, but it left in place the existing rule that permits required minimum distributions to be satisfied with qualified charitable distributions once the IRA owner attains age 70 ½.  Adding to this complication is the ability of an individual to make a contribution to the IRA and in the same year that they direct qualified charitable distributions from the same IRA.

Background: Before the SECURE Act an individual could not make contributions to a traditional IRA for the year in which he/she reached age 70 ½ or any later year. For tax years starting with 2020 the SECURE Act increased the age restriction on contributions to traditional IRAs, so long as the individual has earned income, to age 72. Consequently, an individual who turns age 70 ½ in 2020 is now able to make an IRA contribution and is not yet required to take required minimum distributions until they attain age 72. For those individuals who turned 70 ½ in 2019, they are out of luck; they must continue to take required minimum distributions for 2020.

Qualified Charitable Distributions: The SECURE Act’s changes [IRA contributions after age 70 permitted; required minimum distributions pushed back to age 72],  impact the ability of an IRA owner to make qualified charitable distributions (QCD) from his/her IRA up to $100,000. Those distributions can be used to satisfy the IRA owner’s required minimum distribution for that calendar year. More importantly, a QCD is not included in the IRA owner’s taxable income, thus keeping the IRA owner in lower marginal income tax brackets. As has been repeatedly stated, the QCD is the equivalent of a 100% income tax deduction, as it permits most taxpayers to claim the temporarily enlarged standard deduction without having to itemize their tax deductions, some of which like state and local taxes are capped at $10,000 a year.

  • Qualified Charitable Distributions Before Age 72: An individual who attains age 70 ½ in 2020 may direct qualified charitable distributions from their traditional IRA, while at the same time they do not have to take any required minimum distributions from the same IRA, until that is they attain age 72. In short, while the QCD is permitted for someone who turns age 70 ½ , the charitable distribution from the IRA does not, in effect, satisfy any required minimum distribution as there are none until the IRA owner reaches age 72.
  • Qualified Charitable Distributions “Haircut:” For QCD’s beginning in 2020, the $100,000 QCD annual limit is reduced, but not below zero ($0.00) by the aggregate amount of tax deductions allowed for prior tax years due to the SECURE Act’s changes. In other words, tax deductible IRA contributions made for the year by the IRA owner reaches age 70 1/2 , and later years since IRA contributions can continue to be made so long as the individual has earned income, can reduce the annual QCD $100,000 tax-free distribution allowance. This limitation apparently was put in place to prohibit an IRA owner from ‘gaming the system’ by taking an income tax deduction with regard to a contribution to his/her traditional IRA, and then directing the same pre-tax dollars out of their traditional IRA as a QCD in the same year. Fortunately, not too many IRA owners are inclined to direct distributions of $100,000 from their traditional IRA to their favorite charities.

Conclusion:  While most of the attention given to the SECURE Act has dealt with its 10-year distribution rule for designated beneficiaries of inherited IRAs, there are many other ‘hidden gems’ buried in the Act that it will take time to discover, and then understand. The Act’s impact on qualified charitable distributions is just one example.