Increasing the IRA Required Minimum Distribution (RMD) age from 70½ to 72 would adversely affect tax-free IRA gifts. Current law (enacted in 2006) authorizes tax-free direct transfers to public charities (except Donor Advised Funds and Supporting Organizations) of up to $100,000 annually by individuals 70½ or over. Those transfers to charity are tax-free including RMDs. Although charitable deductions aren’t allowed, the withdrawals aren’t taxable. Not being taxed on income is the equivalent of a charitable deduction.
This, in effect, gives a charitable deduction to taxpayers who take the standard deduction (and there are many more of them now that the standard deduction has been doubled).
Current law benefits itemizers too. Taking a taxable RMD and then making a gift and claiming a charitable deduction doesn’t always result in a wash. The withdrawal increases adjusted gross income. That can muck up the medical expense and casualty loss deductions and increase Social Security taxes.
Additional benefits in some states. Not all states allow income tax charitable deductions. The direct gift to charity from an IRA in states following Federal tax rules won’t be taxable. The RMD won’t be includable in state income—again the equivalent of a charitable deduction.
Increasing the age from 70½ to age 72 for RMDs means that the current tax-encouraged way of benefitting charities is postponed. Charities cannot oppose this provision, but can argue it is another reason to enact the Legacy IRA (below).
Why the increase from 70½ to 72? According to the Ways and Means Committee, the policy behind the current age 70½ rule was to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. However, the age 70½ was first applied to retirement plans in the early 1960s and hasn’t been adjusted to take into account increased life expectancy. Thus the bill increases the Required Minimum Distribution age from 70½ to 72.
The proposed Legacy IRA—briefly stated. The annual ceiling on transfers from a donor's IRA to fund life-income plans (charitable remainder trusts and charitable gift annuities) would be $400,000 for individuals 65 or older. For individuals 70½ (72 if the age is changed) or older, the combined ceiling for direct and life-income transfers from IRAs would be $400,000, with a $100,000 cap for direct transfers.
The Legacy IRA Act was introduced in the House of Representatives in the last two congressional sessions. It is expected to be introduced soon in both the House and Senate.
Among other provisions of the Ways and Means Committee’s bill (called the SECURE* Act):
• Repeal the prohibition on contributions to a traditional IRA by an individual who has attained age 70½.
• Allow long-term part-time workers to participate in 401(k) Plans
• Allow penalty-free withdrawals from retirement plans for any “qualified birth or adoption distributions.”
• Expand 529 education savings accounts to cover costs associated with registered apprenticeships, homeschooling; and up to $10,000 of qualified student loan repayments (including those for siblings).
* SECURE Act: Setting Every Community Up for Retirement Enhancement Act of 2019. That’s a doozy of a name even though it doesn’t describe the Act—no doubt coined by the U.S. Bureau of Acronyms.
Conrad Teitell is a principal at Cummings & Lockwood in Stamford, Conn.