Am I the only one not happy about the SECURE Act’s so-called anti-abuse rule? Read this post carefully and I think you will be unpleasantly surprised.
I gave a webinar on the SECURE Act almost two months ago but I wasn’t sure how exactly the anti double-dipping rule worked (for those who make tax-deductible additions to their IRAs past age 70 1/2 and then attempt to make an IRA rollover gift to charity) – until today. (I actually didn’t want to believe what people were saying)
Kudos to Bill Cass, CFP, CPWA, Director of Wealth Management Programs at Putnam Investments – his article on the topic seemed to be very clear and authoritative, and he actually responded to my request to pin-point the language in the statute.
It was actually right in front of my face – right in the section repealing the maximum age for traditional IRA contributions (section 107 of the SECURE Act). The language is quoted verbatim below – read it and see how fast you can decipher it.
THE BOTTOM LINE
There is a serious penalty waiting anyone who takes advantage of their new ability to make additions to IRAs past age 70 1/2 and then subsequently use the IRA rollover giving provision (Qualified Charitable Distributions – QCDs).
For every dollar you add to your IRA past age 70 1/2, the IRS will remove the QCD tax shield for later QCDs. This means, that if you decide to add the maximum amount to your IRA when you are let’s say 72 (assuming you have earned income to justify it) – that would be $7,000 for someone age 60+ – then at anytime from that point forward if you decide to make a QCD, the first $7,000 of your QCD will be disqualified from tax-free treatment. Let’s say you did a QCD for $10,000 at age 73 after having added $7,000 to your IRA in the previous year. In that tax year (age 73), $7,000 of your IRA rollover gift will be reported as a taxable withdrawal and the remaining $3,000 will still be a tax-free distribution. Of course, you will be able to take a $7,000 deduction on your federal income tax return if you itemize but don’t forget, the 2018 tax plan changes left us with probably less than 10% of taxpayers as itemizers.
Here is another way to look at it. Let’s say you decide to continue working until age 75 and continue adding the maximum of $7,000 a year to your IRA – 4 1/2 years of IRA contributions totaling $31,500 in post age 70 1/2 IRA contributions. For the rest of your life (that’s right, it’s a lifetime penalty), if you decide to start making QCDs, the first $31,500 would be treated as taxable distributions (that you could still deduct if you are an itemizer). My guess is that you would decide NOT to make any QCDs at that point.
ACTION STEP FOR NONPROFITS
At a minimum, you need to add a caveat to your IRA giving materials – an asterisk mentioning that if you make any additions to your IRA past age 70.5 and then want make a QCD, you should consult with your tax advisor.
IS THIS A REAL PROBLEM?
Meaning, how many people will want to and be able to add to their IRAs past age 70.5? I actually think a lot. Firstly, Baby Boomers are generally working well into their 70s (Trump, Biden, Sanders to name a few) – so plenty of people will have earned income past age 70.5. And, it is actually a great planning idea! I asked my dad (who is 83 and currently working for the Census) if he might add to his IRA – he said yes!
And, if a donor has added anything to their IRA past age 70.5, they better be warned before making a QCD!
TIME TO LOBBY?
I actually think the nonprofit world should lobby to get this fixed. If this is so-called double-dipping, then all IRA Rollover giving is double dipping! All IRA contributions, whether made directly or via rollover from a 401K or other plan, were above the line deductions! Yet, QCDs are allowed. Now you are only going after the post 70.5 additions (sounds like age discrimination to me)? It doesn’t make sense to me, and it creates a very complicated issue for nonprofits and donors.
Here is the text of the law – read it and see if you can made sense of what it is saying…..
Sec. 107. Repeal of maximum age for traditional IRA contributions
(a) In general Paragraph (1) of section 219(d) of the Internal Revenue Code of 1986 is repealed.
(b) Coordination with qualified charitable distributions
Add at the end of section 408(d)(8)(A) of such Code the following:
The amount of distributions not includible in gross income by reason of the preceding sentence for a taxable year (determined without regard to this sentence) shall be reduced (but not below zero) by an amount equal to the excess of—
(i) the aggregate amount of deductions allowed to the taxpayer under section 219 for all taxable years ending on or after the date the taxpayer attains age 70½, over
(ii) the aggregate amount of reductions under this sentence for all taxable years preceding the current taxable year.
That’s exactly the case, Jonathan. The IRS can repair it if enough individuals/institutions raise the issue. From now, the only safety for QCDs is if they are made from IRAs where no additions were made from and after 70 1/2
Thank you Neal!! Always great to hear from you!