Required Minimum Distributions

There’s now a record number of 401(k) and IRA millionaires, according to Fidelity (click to view the article)

Not surprising.

Oh, did you notice the big IRA/retirement plan law changes at the end of 2019? The SECURE Act?

Let me put this very succinctly. Quietly, Congress made a few major changes to IRAs and retirement accounts with the SECURE Act. Mainly, they sought to encourage people to have more retirement savings (like required minimum distributions now start at age 72, not 70.5; if you are working past age 70.5, you can now continue to add to your IRA as long as you have earned income; and a few other points).

But, there is one huge change that runs right into the article above – Congress finally killed the Stretch IRA!

Look it up online – even though IRAs and other retirement accounts are heavily taxed, the big solution offered to large IRA account holders has been the so-called Stretch IRA. These plans allowed the IRA account holders to choose a child or grandchild to inherit the IRA but then take the funds out over the recipient’s life expectancy – which could be a really long time. This was the gold standard solution that lawyers to offered their clients.

Now those plans are trash! New law requires most recipients to take out the inherited IRA funds within 10 years! Not so great for million dollar IRAs going to younger people – for lots of reasons.

Anyway, if you are interested in hearing my take on the new law, and some opportunities it offers the nonprofit world, click here to check out my recent webinar on the topic.

This morning at Planned Giving Advisors, we sent out an email with donor-ready, “cut and paste” text to alert your prospects of steps they should be considering should they be interested in IRA rollover giving this year. We are advising that prospective IRA rollover donors consider waiting to see if the expired IRA giving law is reenacted before taking any IRA withdrawals in 2012. This would allow anyone interested in using the IRA rollover to satisfy their Required Minimum Distribution (RDM) to preserve and utilize that important tax savings feature should the law come back into effect later in the year.

If you would like a copy of the donor-ready IRA alert, please feel free to contact Kevin Kasper at kevin@plannedgivingadvisors.com or by phone at 973-732-2455.

In response to our email alert, we received an interesting question that was worth posting:

Why not simply advise donors to have the distribution go from their IRA directly to charity in 2012. If the rollover is reinstated it will qualify, and if it is not the distribution would be characterized as a withdrawal followed by a gift to charity. In either case, it would qualify as their minimum distribution.

I think it is a great question, even though we didn’t take that approach. Here is our response:

What you are saying is definitely true from a legal/tax planning perspective. In fact, anyone even age 59 ½ and older could be encouraged to give from IRAs, take the income tax hit, and get a mostly offsetting deduction. Why hasn’t that idea worked in practice?

The problem is that donors in general have never taken to the idea of making a charitable gift that will cause taxable income even though they would get a “mostly offsetting” deduction. You can never say it is a “non-taxable” transaction because you don’t know how the extra income impacts their tax brackets – and I believe this is enough of a reason for most donors not to be interested. The beauty of the IRA charitable rollover provision is that it creates a clear, zero tax transfer method and that apparently works for donors.

From a marketing perspective, our approach is to put in front of prospects the most palatable options. By asking donors to commit an IRA rollover gift before the law is reenacted, even though you can project little or no tax cost should it not be reenacted, is still a bit risky. In face to face conversation with prospects, if they understand the risks and costs, your idea is certainly an option. But, in an email alert, we favor sticking with options that have the least resistance from typical donors.