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January 07, 2020 at 03:26 PM
The new year brings advisors lots of changes to retirement planning, thanks to the passage of the Setting Every Community Up for Retirement Enhancement (Secure) Act in late 2019 (as part of the year-end spending bill).
In addition to increasing the age for required minimum distributions and dropping restrictions on IRA contributions for some workers, the sweeping retirement bill also generally puts an end to the use of “stretch IRAs.” Buried in this mountain of legislation, certified financial planner and CPA Jeffrey Levine found a quirk that he says could save retired taxpayers thousands of dollars over several years.
Levine, head of advisor education for Kitces.com and CEO of BluePrint Wealth Alliance, and other members of Kitces’ team have been meticulously reviewing the new law.
After firing off a series of 34 tweets on the Secure Act last month, Levine’s diving into it further in early January and just discussed (via social media) the convoluted issue of the Secure Act’s impact on qualified charitable distributions via a new anti-abuse rule.
“To get any of this, you need a basic understanding of new QCD anti-abuse rule,” Levine said on Twitter last week. “Basically, any QCDs are ‘rejected’ until total amount rejected = DEDUCTIBLE Trad’l IRA contributions made ≥ 70.5 Behold the glitch in the Matrix!”
For those without the time to digest the anti-abuse rule and Levine’s full analysis of it (see below), the CPA and popular planner gave the following summary.
“By forgoing the Traditional IRA deduction to which one might otherwise be entitled, it’s possible to “trade” pre-tax Traditional IRA money for after-tax Traditional IRA money. Our Tax Code is absolutely ridiculous!” he tweeted.
Which clients will be affected by the QCD anti-abuse rule? Individuals who want to contribute to an IRA and also to make charitable donations from the IRA.
A QCD, done properly, allows an IRA holder to donate up to $100,000 a year from the IRA directly to a charity without paying taxes on the donation.
Levine explained in another Tweet: “The contribution is nondeductible and, over time, the contribution can be distributed tax-free (pro-rata). The gains on the nondeductible contribution would be tax-deferred, but subject to income tax when distributed. IRS looks at all IRAs as 1 giant IRA. Separate acct = useless.”
How does this benefit retirees? “Gains grow tax-deferred vs. being taxable each year if put into a brokerage account. Relative benefit would depend on things like tax rate, yield, type of yield, turnover, etc.,” he said.
