Ways to Give
The Secure Act 2.0
The Secure Act 2.0, included in the Consolidated Appropriations Act of 2023 (H.R. 2617), offers new enhancements and expands coverage of retirement benefits.
This article is for informational purposes only. Focus on the Family does not provide legal, tax, financial, or other professional advice, and this article cannot be relied upon as such. You should consult professional advisors concerning the legal, tax, or financial implications of your charitable and financial activities.
Since the enactment of the Secure Act in 2019, lawmakers have been working to add new measures that promote retirement savings. Secure Act 2.0 enhances the required minimum distribution age, amplifies the catch-up contribution limit, streamlines the conversion of certain Section 529 plans into Roth IRAs, and extends the availability of retirement plans to employees with moderate to lower incomes.
- Required Minimum Distributions from IRAs: As of 2023, the required minimum distribution (RMD) age will be raised from age 72 to 73. Further changes are expected in 2033 when the RMD age will be increased to 75 for individuals who attain age 74 that year. Existing RMD recipients will continue to receive annual distributions based on their current age. Employees who own less than 5% of their company may opt to defer RMDs until retirement, even if that occurs after the age of 73 or 75.
- Qualified Charitable Distributions Have Been Enhanced: Starting in 2024, the IRA charitable rollover or qualified charitable distribution (QCD) limit of $100,000 will be adjusted for inflation. Individuals aged 70½ or above may transfer IRA distributions directly to a charity and avoid income recognition on the distribution. The Act also broadens the scope of the of the QCD by enabling a one-time transfer of up to $50,000 to fund an immediate charitable gift annuity. This amount will also be adjusted for inflation in 2024. Dive further into the enhancement of qualified charitable distributions, here.
If you would like to see what funding a CGA using your IRA could look like for you, please request a personalized example here or by contacting our experienced team at [email protected] or 800-782-8227.
- Roth 401(k) Plans Exempt from RMDs: Presently, Roth IRA owners are not subject to mandatory distributions, even if they’ve attained the standard RMD age. Effective 2024, Roth 401(k) plans will also be exempted from RMDs. This exemption implies that Roth IRA and 401(k) plans can grow in value over the owner’s lifetime, given the absence of any necessary distributions.
- Section 529 Plans Rolled Over to Roth IRAs: Section 529 plans are often utilized for college savings. In situations where the plan has been operational for 15 years and is no longer necessary due to the beneficiary’s graduation, up to $35,000 from the plan can be transferred to a Roth IRA for the benefit of that individual.
- Catch-Up Contributions: Individuals aged 50 and above are eligible to make an additional catch-up contribution towards retirement plans. During 2023, retirement plan participants can add an additional $1,000 to their retirement account (for a total of $7,500). From 2025 onwards, individuals aged 60 to 63 will be allowed to make larger catch-up contributions towards their Sec. 401(k), 403(b), or 457 plans as amounts will be indexed for inflation. The revised catch-up limit will be determined as the higher of $10,000 or 150% of the catch-up limit applicable for that particular year.
- Charity as Remainder Beneficiary: Individuals with disabilities or chronic illnesses receiving an inherited IRA will be able to take the IRA distributions over their lifetime, rather than being required to withdraw the entire balance within 10 years. If a qualified charity is the remainderman of a trust for the beneficiary who is disabled or chronically ill, the life expectancy stretch is still allowed.
- Reduced Penalty for Required Minimum Distributions: Currently, failure to take a required minimum distribution earns a penalty of 50%. But starting in 2023, this penalty will be reduced to 25%. If the plan participant promptly corrects the failure, the excise tax on the penalty will be reduced further to 10%.
- Roth Catch-Up Contributions: Individuals aged 50 and above are allowed to make a catch-up contribution to their retirement plans. Beginning in 2024, individuals with incomes exceeding $145,000 will be required to transfer their catch-up contributions to a Roth 401(k) or IRA and pay tax on the contribution. However, future distributions from the Roth account will be exempt from taxes.
- Matching Contributions for Student Loan Payments: Many young employees carry considerable student loans, making it difficult for them to both pay off their loans and save for retirement. Employers can now provide a matching contribution towards a Section 401(k) or 403(b) retirement plan corresponding to the employee’s student loan payments.
- Withdrawals for Emergency Expenses: An additional 10 percent tax may be added to early distributions from tax-preferred retirement accounts such as 401(k) plans and IRAs unless an exception applies. A new exception has been adopted under Section 115, allowing distributions to be made for certain unforeseen or immediate financial needs for personal or family emergency expenses. A taxpayer may make only one distribution of up to $1,000 per year and can repay the distribution within 3 years. However, no further emergency distributions are allowed during the 3-year repayment period unless the distribution is repaid.
- Roth 401(k) Plans Exempt from RMDs: Presently, Roth IRA owners are not subject to mandatory distributions, even if they’ve attained the standard RMD age. Effective 2024, Roth 401(k) plans will also be exempted from RMDs. This exemption implies that Roth IRA and 401(k) plans can grow in value over the owner’s lifetime, given the absence of any necessary distributions.
- Reduced Penalty for Required Minimum Distributions: Currently, failure to take a required minimum distribution earns a penalty of 50%. But starting in 2023, this penalty will be reduced to 25%. If the plan participant promptly corrects the failure, the excise tax on the penalty will be reduced further to 10%.
- Section 529 Plans Rolled Over to Roth IRAs: Section 529 plans are often utilized for college savings. In situations where the plan has been operational for 15 years and is no longer necessary due to the beneficiary’s graduation, up to $35,000 from the plan can be transferred to a Roth IRA for the benefit of that individual.
- Roth Catch-Up Contributions: Individuals aged 50 and above are allowed to make a catch-up contribution to their retirement plans. Beginning in 2024, individuals with incomes exceeding $145,000 will be required to transfer their catch-up contributions to a Roth 401(k) or IRA and pay tax on the contribution. However, future distributions from the Roth account will be exempt from taxes.
- Catch-Up Contributions: Individuals aged 50 and above are eligible to make an additional catch-up contribution towards retirement plans. During 2023, retirement plan participants can add an additional $1,000 to their retirement account (for a total of $7,500). From 2025 onwards, individuals aged 60 to 63 will be allowed to make larger catch-up contributions towards their Sec. 401(k), 403(b), or 457 plans as amounts will be indexed for inflation. The revised catch-up limit will be determined as the higher of $10,000 or 150% of the catch-up limit applicable for that particular year.
- Matching Contributions for Student Loan Payments: Many young employees carry considerable student loans, making it difficult for them to both pay off their loans and save for retirement. Employers can now provide a matching contribution towards a Section 401(k) or 403(b) retirement plan corresponding to the employee’s student loan payments.
- Charity as Remainder Beneficiary: Individuals with disabilities or chronic illnesses receiving an inherited IRA will be able to take the IRA distributions over their lifetime, rather than being required to withdraw the entire balance within 10 years. If a qualified charity is the remainderman of a trust for the beneficiary who is disabled or chronically ill, the life expectancy stretch is still allowed.
- Withdrawals for Emergency Expenses: An additional 10 percent tax may be added to early distributions from tax-preferred retirement accounts such as 401(k) plans and IRAs unless an exception applies. A new exception has been adopted under Section 115, allowing distributions to be made for certain unforeseen or immediate financial needs for personal or family emergency expenses. A taxpayer may make only one distribution of up to $1,000 per year and can repay the distribution within 3 years. However, no further emergency distributions are allowed during the 3-year repayment period unless the distribution is repaid.
You can review the Secure Act 2.0 in its entirety by visiting the Senate website, here.
Diving Further into the Enhancements of Qualified Charitable Distributions
Section 307 of the Secure 2.0 Act permits a one-time transfer of $50,000 from an IRA to a life income plan. This update modifies a specific part of the Internal Revenue Code, namely Section 408(d)(8), and applies solely to eligible life income plans. Starting on January 1, 2023, a qualified charitable distribution (QCD) of up to $50,000 from your IRA may be made through this transfer method.
The $50,000 IRA distribution may fund a non-assignable charitable remainder annuity trust (CRAT), standard payout charitable remainder unitrust (CRUT), or immediate charitable gift annuity (CGA). However, a net income plus makeup unitrust or a deferred payment gift annuity do not qualify as charitable entities for this type of funding. Additionally, the CRUT or CRAT must solely be funded with qualified charitable distributions (QCDs), and other assets cannot be added.
For a charitable remainder trust, the remainder interest must be distributed to a nonprofit organization. A charitable gift annuity must be qualified under Section 501(m)(5)(B) and have a payout rate of 5% or higher. In some cases, for two-life gift annuities where the IRA owner is over 70 ½ years old and their spouse is under 62 years old, it may be necessary to increase the payout rate to 5% to meet qualification criteria. However, charities that have filed the ACGA rates or a fixed rate schedule in regulated states like New York or California may not be allowed to increase the payout rate, as per state insurance commissioner regulations.
The payouts from CGA, CRUT, or CRAT must benefit either the IRA owner or the IRA owner and their spouse. Any payments from a charitable remainder trust will be classified as ordinary income, as there is no investment in the contract under Section 72(c). Similarly, all payouts from a gift annuity will also be considered ordinary income.
The bill permits an IRA adjustment for inflation beginning in 2024 onwards, increasing the QCD annual limit from $100,000 to $105,000, and the QCD limit for funding a CGA or unitrust from $50,000 to $53,000. Notably, QCDs must be directly transferred to qualified nonprofits and cannot go to donor-advised funds or supporting organizations.
Even though funding a CGA with a QCD is a one-time opportunity, donors will still receive favorable fixed-rate lifetime payments.
Questions for JCT about IRA to Gift Annuity or CRT.
After significant legislation is passed, the Joint Committee on Taxation (JCT) releases a detailed guide outlining the government’s stance on the provisions. This guide is known as the JCT “Bluebook.” As a result of the passing of the Consolidated Appropriations Act of 2023, a Bluebook on the bill will be eventually published by JCT.
Regarding the IRA funding of a Gift Annuity or CRT, there are three notable Section 307 matters that require guidance from JCT. These include clarifying if the full $50,000 rollover will meet the required minimum distribution (RMD) requirement if a $105,000 QCD for an outright gift and a one-time $50,000 QCD to a gift annuity or CRT can both be made in the same year and if two spouses are allowed to transfer $50,000 each to a two-life unitrust or gift annuity.
- Required Minimum Distribution (RMD): It is unclear whether the full amount of $50,000 for the Qualified Charitable Distribution (QCD) serves as RMD fulfillment or solely the charitable portion of the plan can offset the RMD. The Legacy IRA Act has undergone several revisions, with one version including a provision that the entire value of the transfer would offset the RMD for the year. However, following the initial IRA rollover’s passing in the Pension Protection Act of 2006, the Joint Committee on Taxation (JCT) stated that only the outright charitable component would fulfill the RMD. Therefore, it is crucial for the JCT to clarify whether the full $50,000 or only the charitable portion qualifies for RMD fulfillment.
- Immediate and Life-Income QCDs: There is a question regarding whether both the Section 408(d)(8)(A) $105,000 Qualified Charitable Distribution (QCD) and the Section 408(d)(8)(F) $50,000 QCD can be utilized for a gift annuity or Charitable Remainder Trust (CRT) in the same year. While the earlier version of the Legacy IRA Act had a higher limit and explicitly allowed for the combination of these two gifts, it is unclear whether the Joint Committee on Taxation (JCT) would allow the use of both provisions in the same year, as they are separate provisions. It will be important for the JCT to provide clarification on this matter.
- Spousal Joint Unitrust: Can two spouses who are both over age 70½ each donate $50,000 from separate IRAs to a single charitable remainder trust or a two-life gift annuity? The QCD provisions permit a taxpayer to donate up to $50,000 (subparagraph (F)(i)). The remainder of the CRT must go to a qualified exempt charitable organization (subparagraph (F)(iii)), and the trust must be non-assignable and solely benefit the IRA owner and spouse (subparagraph (F)(iv)). Notably, subparagraph (F)(ii) specifies that the trust will be funded with “qualified charitable distributions,” suggesting that multiple QCDs to a unitrust are allowed. As a result, JCT should allow a spousal unitrust or a two-life gift annuity to be funded with a $50,000 QCD from each spouse, given that they are both over age 70½ and the funding occurs simultaneously.
If you would like to see what funding a CGA using your IRA could look like for you, please request a personalized example by contacting our experienced team, via email [email protected] or call 800-782-8227
