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George F. Bearup, J.D. Senior Legal Trust Advisor

8-Sep-20

SECURE Act Clarifications

Take-Away: The IRS recently provided some model questions and answers to some of the new SECURE Act provisions. Most of the Q&A examples were pretty straightforward, with no surprises. Of some interest is how IRA contributions made by an individual who also makes a qualified charitable distribution in the same calendar year are affected.

Background: In IRS Notice 2020-68 issued on September 2, 2020, the IRS provided more guidance on several of the new SECURE Act provisions (which now seems like ‘old news’ in light of all the CARES Act legislation and IRS rule changes that have preoccupied us in 2020.) Some of the provisions that this Notice addresses with further elaboration, or with Q&A’s, deal with: (i) small employer automatic enrollment tax credits; (ii) repeal of the maximum age (formerly 70 ½) for traditional IRA contributions; (iii) participation by long-term, part-time employees in 401(k) plans;  (iv) qualified birth and adoption distributions from retirement plans; and (v) offsets to qualified charitable distributions if deductible IRA contributions are made in the same year. Two of these topics on which IRS guidance is provided under the Notice follow.

Age 70 ½ Repeal: Prior to the SECURE Act, an individual could not contribute to an IRA after attaining the age 70 ½. [IRC 219(d)(1).] With the SECURE Act, an individual can now contribute to an IRA in their 70’s (if they continue to have earnings.) An IRA custodian is not required to accept post-age 70 ½ contributions. If the custodian chooses to do so, it must amend its IRA contracts to provide for those post-age 70 ½ contributions. The IRS promises to furnish model provisions to amend existing custodial agreements, but it did not say when to expect those model amendments. The IRS custodian must distribute a copy of the amendment and new disclosure statement [IRC 408(i)] to each benefited individual. This means the custodian must mail the amendment to the last known address no later than the 30th day after the later of the date on which the amendment was adopted or the date the amendment becomes effective. Thus, there will be more work for the IRA custodian if it chooses to accept post-age 70 ½ contributions to an IRA. (It is hard to imagine an IRA custodian actually turning away contributions, but I learn something new every day!)

No RMD Offset: An individual who has a required minimum distribution (RMD) obligation cannot offset against that RMD for a taxable year from their IRA the amount of their post-age 70 ½ contributions for the same calendar year. These are separate transactions which are independently reported by the IRA custodian to the IRS.

Reduction in Qualified Charitable Distributions: We have covered this topic previously. Any post-age 70 ½ IRA contributions will reduce, dollar-for-dollar, the amount of RMD that is excluded from reportable income when qualified charitable distributions (QCD) are made from the traditional IRA. The following example is provided in the Notice:

  • Example: Dan turned age 70 ½ before 2020. Dan contributes $5,000 to his traditional IRA for each of 2020 and 2021. Dan does not make an IRA contribution in 2022. Dan makes no qualified charitable distribution (QCD) for 2020, but he makes a QCD of $6,000 for 2021 and $6,500 for 2022. The excludable amount (from Dan’s reportable income) of Dan’s QCD for 2021 is the $6,000 QCD reduced by the $10,000 aggregate amount of his post-age 70 ½ contributions for 2021 and earlier tax years. Consequently, for Dan, these amounts are $5,000 for each of 2020 and 2021, which results in no excludable amount from Dan’s reported income despite his QCD for 2021 of $6,000. [$6,000 QCD less $10,000= ($4,000.)]

The excludable amount of Dan’s QCD for 2022 is his $6,500 QCD 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 his QCD for earlier tax years. $6,000 of the aggregate amount of post-age 70 ½ IRA contributions deducted from Dan’s income does not apply to 2022 because that amount has already reduced the excludable amount of Dan’s QCD for 2021. The remaining $4,000 of the aggregate amount of Dan’s post-age 70 ½ IRA contributions deducted reduces the excludable amount of any QCD for subsequent years. Consequently, the excludable amount of Dan’s QCD for 2022 is $2,500. [$6,500 QCD less $4,000 = $2,500 excludable amount of RMD from Dan’s reported income for 2022.]

Conclusion: As mentioned earlier, there are no big surprises with this Notice. The basic examples are helpful to understand the required setoff against, or reduction in, QCD’s with regard to any pre-tax IRA contributions by someone over age 70 ½.