SECURE 2.0 : What You Need to Know About Qualified Charitable Distributions

Qualified charitable distributions (QCDs) have been a beneficial option for both donors and nonprofits for some time. But changes made in the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Actcould make QCDs more appealing to potential donors and create additional opportunities for organizations.

Understanding QCDs

QCDs were first established by the Pension Protection Act of 2006. Their availability was extended several times, eventually becoming permanent as a result of the Protecting Americans from Tax Hikes Act of 2015.

Taxpayers can make QCDs from traditional or inherited individual retirement accounts (IRAs) with required minimum distributions (RMDs). Transfers must be made directly from an IRA to a charity. Specifically, a taxpayer can distribute up to $100,000 per year directly to a qualified charity beginning at age 70½ ($200,000 for married couples filing jointly if both spouses are age 70½ or older). The distribution doesn’t count toward an individual’s charitable contribution deduction but it’s removed from taxable income and treated as an RMD.

Making Donations

The new SECURE 2.0 law includes some significant updates. For starters, the $100,000 annual distribution limit will be indexed annually for inflation beginning in 2024. As a result, donors can make greater QCD donations over time.

The larger potential impact comes from the addition of a new way to make QCDs. Beginning in 2023, donors can make a QCD of up to $50,000 through a split-interest entity — a charitable remainder unitrust (CRUT), charitable gift annuity (CGA) or charitable remainder annuity trust (CRAT). Split-interest entities generally allow donors to make gifts while also creating an income stream for themselves. After a designated period of time, the balance goes to the charity.

As with regular QCDs, the $50,000 distribution must come from a traditional IRA. It counts toward RMDs without adding taxable income for the donor. Spouses can each make a donation to the same split-interest entity to double the gift. The $50,000 limit also will be adjusted annually for inflation. However, taxpayers are limited to one such distribution per lifetime and only the donor and donor’s spouse can be income beneficiaries.

The split-interest entity must pay a 5% minimum fixed percentage for the life of the donor or the donor’s spouse, and those payments must begin within one year of funding. The payments are taxed as ordinary income to the beneficiary.

Educating Donors

Many current and prospective donors may not be aware of the QCD option, let alone recent enhancements. Your nonprofit needs to take the initiative and inform supporters about the benefits for donors and organizations alike.

Consider preparing an explanation — a presentation, a brochure or both — on the basics of how a QCD works, stressing the tax benefits for donors. While it’s true they can’t claim a charitable contribution deduction for a QCD, satisfying RMD rules without increasing their taxable income could save even more in taxes. QCDs also can play a part in estate planning.

But don’t limit your education campaign to the technicalities and financial benefits for donors. Supporters are increasingly interested in outcomes. So be as specific as you can about how you will apply a donor’s QCD — for example, to fund a new program or facility or subsidize additional staff.

Stepping Up

Done right, investing in education for donors could boost your bottom line substantially. Let us know if you have any questions about how you and your supporters can make the most of QCDs.