The SECURE Act 2.0, enacted at the end of 2022, created a new type of qualified charitable distribution (QCD) that generally is being called the Legacy IRA.
As I’ve said before, QCDs are the best way for most people age 70½ or older to make charitable contributions.
When you’re 70½ or older, instead of writing a check or transferring property to charity, you direct the custodian of a traditional IRA to make a distribution from the IRA to charity. The gift isn’t included in your gross income, but it counts toward your required minimum distribution (RMD) for the year, if any. So, you satisfy the RMD requirement without increasing your taxable income.
A QCD isn’t deductible on your income tax return.
The QCD can exceed your RMD for the year. Each taxpayer can make up to $100,000 of QCDs in 2023, which increases to $105,000 in 2024, and will increase each year after that with inflation. You still can make a QCD and exclude the distribution from your income when you don’t have to take an RMD for the year. This year’s QCD will reduce future RMDs and allow you to take distributions from a traditional IRA without incurring income taxes.
QCDs can’t be made from accounts other than traditional IRAs.
The SECURE Act 2.0 made two important changes to QCDs.
The first change is to index the $100,000 limit for inflation.
The second change allows a new once-in-a-lifetime election to treat as a QCD an IRA distribution that creates a charitable split-interest, up to $50,000. This increases to $53,000 in 2024.
A charitable split-interest is an entity or contract that benefits both charity and one or more individuals. The split-interests that can be funded by QCDs are charitable gift annuities (CGAs) and charitable remainder trusts (CRTs).
In a CGA, you transfer money to a charity and receive a promise the charity will make regular, fixed payments for life or a period of years to you, or you and your spouse. It’s just like a commercial annuity, except the income payments from the CGA are less than you’d receive from a commercial annuity. The difference is a gift you make to charity.
A CRT has a lot of variations, but in the standard CRT you transfer money or property to a trust, which the trust invests. The CRT pays you or the other beneficiaries income for life or a period of years. After the income period ends, whatever remains in the trust goes to charity.
A CRT can be either a charitable remainder annuity trust (GRAT), which pays a fixed annual amount of income each year, or a charitable remainder unitrust (GRUT), which distributes a fixed percentage of the trust’s current value each year.
Distributions from IRAs to split interests don’t qualify for QCDs under the original rules, because they aren’t made directly and for the sole benefit of a charity.
But the SECURE Act 2.0 lets you make a one-time election to treat as a QCD a distribution from a traditional IRA to a CGA or CRT. The election can apply to distributions up to $50,000 in 2023 or $53,000 in 2024. The election is once-in-a-lifetime per taxpayer, not per IRA. There’s no carryover of the unused amount if the distribution for a split interest is less than the maximum.
Though the term isn’t used in the tax code, many charities and financial professionals are calling these transactions Legacy IRAs.
The Legacy IRA strategy allows you to move money tax free from a traditional IRA to a vehicle that will pay you income for life, whether it is a CGA or CRT. All or most of the income received from the CGA or CRT will be included in your gross income.
Income payments from a CGA must begin within one year after the distribution to qualify as a QCD.
The Legacy IRA also reduces the balance in your traditional IRA, which reduces future RMDs.
Suppose Max Profits has a large traditional IRA and is taking RMDs. He has other sources of income and assets, so he doesn’t need the RMDs to pay his expenses.
Max’s RMD for this year is $75,000. Max can transfer $50,000 to a charity in return for a CGA. He’d have to take an additional $25,000 distribution to satisfy the rest of his RMD. Max can make a regular QCD with that $25,000, ensuring the entire RMD for the year is tax free.
The CGA then will pay Max income each year, spreading what would have been most of this year’s RMD over the rest of his lifetime. The transaction also reduces his IRA balance.
Because the distribution isn’t included in his adjusted gross income, Max avoids not only income taxes but potentially also avoids or reduces Stealth Taxes, such as the Medicare premium surtax, taxes on Social Security benefits, the 3.8% net investment income tax, and more.
Like other annuities, the annual payment from a CGA is based on the donor’s age and current interest rates. Most charities follow the suggested interest rate and payment schedule recommended by the American Council on Gift Annuities.
Only traditional IRAs can be used to set up the Legacy IRA. Roth IRAs, any type of 401(k), and other types of accounts don’t qualify.
A CGA or CRT must meet certain requirements for distributions to qualify as QCDs. You have to depend on the charity to know and comply with the rules.
Most large charities will incur the legal fees and other expenses to set up CRTs and CGAs that comply with the law. They’ll also administer CRTs at no charge when they are the charitable beneficiaries. Otherwise, the cost of setting up and administering your own CRT would be excessive for a $50,000 contribution.
Remember, it’s a one-time election. So if you transfer less than $50,000 for a split interest, you used the election for your life.
The SECURE Act 2.0 says a distribution doesn’t qualify for the Legacy IRA if any person other than the IRA beneficiary and his or her spouse has an income interest. Apparently, a distribution won’t qualify if others, such as your children or grandchildren, are contingent beneficiaries.
Most established charities are ready to take Legacy IRA contributions in return for CGAs and many can set up CRTs that qualify. Determine the charity or charities that interest you, then contact them. You should be able to set up no-cost Legacy IRAs at many national charities, college and university endowments, and local or regional community foundations.