Your Questions About the SECURE Act Answered

The SECURE Act continues to raise questions. This month, we dive into those I’ve been receiving from readers and try to reduce the confusion about the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

We start with the interplay between the SECURE Act and qualified charitable distributions (QCDs). Here’s a refresher on QCDs.

A QCD occurs when someone who is at least age 70½ has his or her IRA make a distribution directly to a public charity. The IRA custodian can transfer the money or property to the charity, or the custodian can give the IRA owner a check made payable to the charity, which the owner delivers to the charity.

The amount of the QCD is not included in the gross income of the IRA owner, and the owner doesn’t receive a charitable contribution deduction. But the QCD also counts toward the owner’s required minimum distribution (RMD) for the year, if one is required. The QCD can be used for all or part of the RMD. Each IRA owner is allowed up to $100,000 of QCDs each year.

One provision of the SECURE Act allows contributions to traditional IRAs by an IRA owner who is age 70½ or older. Under previous law, contributions weren’t allowed to traditional IRAs after 70½ but were allowed to Roth IRAs. Traditional IRA owners can make contributions at any age after December 31, 2019.

Here’s the question people are asking.

How do contributions to traditional IRAs after age 70½ affect QCDs?

Can someone deduct a post-70½ contribution to a traditional IRA and then make a QCD?

No, you can’t do that. The SECURE Act has an anti-abuse rule to prevent this sort of double-dipping.

Any QCD will be reduced, but not below $0, by the cumulative post-70½ deductible IRA contributions that haven’t already been used to reduce a QCD. That means the amount intended as a QCD is included in gross income for the year as a taxable distribution to the extent it is reduced by the post-70½ deductible contributions.

Note that the cumulative post-70½ IRA contributions are used to reduce QCDs. If you make deductible traditional IRA contributions from ages 70½ through 74, for example, and make your first QCD at 75, the contributions from 70½ through 74 reduce the QCD.

But also note that only deductible post-70½ IRA contributions reduce QCDs. If you don’t deduct the IRA contribution, it doesn’t reduce QCDs. Some tax advisors say you can contribute to the IRA and voluntarily don’t deduct it, even if you qualify for a deduction.

Then, the post-70½ contributions don’t affect your QCDs. Keep in mind that to make a traditional IRA contribution after 70½, you must have earned income from employment or self-employment. Either you must be working or your spouse must be working and making spousal IRA contributions for you.

Another SECURE Act provision raising questions is the reset of the starting age of RMDs to age 72 instead of age 70½. The new RMD starting age applies to traditional IRA owners who turn age 70½ after December 31, 2019. If you were already age 70½ or older by the end of 2019, then you have to follow the old law and take your first RMD by April of the year following the year you turned 70½.

So, if you turned 70½ during 2019, you need to take the first RMD by April 1, 2020, if you didn’t take it during 2019. Then, continue taking annual RMDs for the rest of your life or until the IRA is depleted. If you turn 70½ during 2020, you don’t have to take the first RMD until April 1 of the year after you turn 72.For most people, it would be better to take the first RMD in the year they turn 72 and the second RMD the following year.

By waiting until April of the year following the year you turn 72, you have to take two RMDs in the year you turn 73. Another point of confusion is that the change in the RMD starting age doesn’t affect the starting age for QCDs.

You can make a QCD after age 70½ even if you don’t have to start RMDs until age 72. Suppose you direct the IRA custodian to make a distribution directly to a charity in the year you turn 71. When the other requirements are met, this qualifies as a QCD, so the distribution isn’t included in your gross income. It doesn’t reduce any future RMDs, but you’re able to shift money from your traditional IRA to a charity without paying income taxes.

Questions also are raised about the interplay of traditional IRA contributions after 70½ and RMDs.

You still have to take RMDs on schedule, even if you make a contribution to the same IRA that year, and you can’t effectively use the RMD to make a contribution to the IRA. You include the RMD in gross income for the year. You might or might not deduct the IRA contribution, depending on your income level and whether you are covered by an employer retirement plan. Remember, you need earned income from a job or self-employment to be able to make an IRA contribution. Those who already inherited IRAs or other retirement accounts are worried they might have to adjust to the new rules requiring the inherited account to be distributed within 10 years. That’s not the case.

The elimination of the Stretch IRA applies only to retirement accounts inherited after December 31, 2019. If the original owner of the account died before January 1, 2020, then the beneficiaries of that account can use the old rules and establish Stretch IRAs.

The elimination of the Stretch IRA also applies to Roth IRAs (as well as 401(k)s and other retirement accounts). Beneficiaries of Roth IRAs generally must distribute the accounts within 10 years, unless they qualify for one of the exceptions such as being a surviving spouse, minor child or disabled individual.

The distributions from the inherited Roth IRAs still are tax free. People ask what the point was in applying the end of the Stretch IRA to Roth IRAs. Congress wants the money out of the Roth IRAs so that any future income and gains on the money are taxed instead of being tax-free within the Roth IRA.