The updated Setting Every Community up for Retirement Enhancement (SECURE 2.0) Act of 2022 made some important changes to the initial SECURE Act passed in 2019. Among these are expansions on retirement plan options and changes to rules surrounding qualified charitable distributions.
Not-for-profit organizations need to understand how these changes could be leveraged to support fundraising and development efforts.
Qualified Charitable Distributions
A qualified charitable distribution is a tax-efficient way for taxpayers 70 1/2 years and older to donate funds from their individual retirement account (IRA) to a qualified charitable organization.
Previous Qualified Charitable Distribution Guidelines
Under prior qualified charitable distribution rules, an individual could directly transfer up to $100,000 per year from their IRA to a qualified charity without incurring taxes on the distribution. The donated funds count towards the individual’s required minimum distribution (RMD) for the year. For married couples, if both spouses are 70 1/2 or older and have IRAs, each spouse can exclude up to $100,000 for a total of $200,000 per year.
Qualified Distribution Guidelines for Not-for-Profits
To be eligible for a qualified charitable distribution, the charity must be a qualified 501(c)(3) organization, and the distribution must be made directly from the IRA custodian to the charity. The individual can’t receive any benefit from the donation. The RMD isn’t recognized as income to the donor, and it doesn’t qualify as a charitable contribution deduction.
Although a charitable deduction isn’t available, the donor must get a written acknowledgement letter of their contribution from the charitable organization before filing their return. The acknowledgement must state the date and amount of the contribution and indicate whether the donor received anything of value in return.
A qualified 501(c)(3) organization includes public charities such as churches, educational, medical, and governmental organizations. Qualified charitable organizations exclude private foundations, use of donor advised funds, and charities whose exempt purpose is supporting other exempt organizations.
Before the SECURE 2.0 act, a donor couldn’t make a qualified charitable distribution to a donor-advised fund, private foundation, or any supporting organizations, even though these are categorized as charities. Donors should check before making a gift to be certain the organization is qualified to accept qualified charitable distributions.
Overall, a qualified charitable distribution is a tax-efficient way to donate to charity while also satisfying RMD requirements, reducing personal income tax liability for the year, and lowering the value of estate assets.
SECURE Act 2.0
Under the new provisions under the SECURE Act 2.0, there are several changes that not-for-profit organizations should know. Following are a few key highlights for donors 70 1/2 or older.
Max Annual Qualified Charitable Distribution Increased
Beginning in 2024, the $100,000 maximum qualified charitable distribution amount will be annually indexed for inflation. This means that, over time, individuals can make larger charitable contributions through their qualified charitable distributions.
Qualified Charitable Distributions as Remainder Trusts or Charitable Gift Annuities
Starting in 2023, qualified charitable distributions of up to $50,000 can be transferred from a traditional IRA to a split-interest entity that will pay a 5% minimum fixed percentage over the life to the donor or their spouse.
Under the SECURE Act 2.0, eligible split-interest entities include charitable remainder unitrusts, charitable remainder annuity trusts, or charitable gift annuities. Although the transfer doesn’t qualify for a charitable contribution deduction, it doesn’t trigger income recognition on the transfer, and it satisfies all or part of the donor's RMD.
Although split-interest entities are tax-exempt, any unitrust or annuity distributions paid from the entity will be taxable to the donor or other non-charitable beneficiary during the donor’s lifetime.
Note that this transfer can only be made once during a single tax year for a maximum of $50,000. Smaller amounts can be combined to reach the $50,000 limit for such year. The $50,000 cap will be adjusted for inflation for tax years after 2023.
How to Leverage Changes to a Qualified Charitable Distribution
So, how can not-for-profit organizations leverage these new provisions to support their fundraising and development efforts? Below are a few possibilities.
Educate Your Donors About Qualified Charitable Distributions
Make sure that your donors are aware of the new provisions under SECURE 2.0 and how they can use qualified charitable distributions to support your organization. Inform your donors about the opportunity to decrease their federal (and potentially state) taxes, as distributions aren’t counted as part of their adjusted gross income.
Inform Donors on the Impacts of Qualified Charitable Distributions
While charitable gifts of all sizes are necessary and helpful, large gifts can fund new programs, better facilities, and other charitable opportunities. Consider communicating how the financial impact of maximum qualified charitable distributions is different from other charitable contributions.
Share How Qualified Charitable Distribution Can Help With Estate Planning
Qualified charitable distributions can be an effective way to support charitable causes while also optimizing one's estate plan.
Traditional IRA assets contribute to an estate’s taxable value. qualified charitable distributions, however, can help IRA owners reduce the size of their taxable estate, potentially reducing estate tax liability and preserving more of their estate for their loved ones.
Overall, qualified charitable distributions can be a smart strategy for those looking to give back to their community while also planning for the future. The new provisions under SECURE Act 2.0 offer exciting new opportunities for nonprofit organizations to support their development efforts and make a greater impact.
We’re Here to Help
If you’d like more information about the SECURE 2.0, you can explore some of our additional resources. If you’d like more guidance on how the SECURE Act 2.0 would affect your not-for-profit organization, contact your Moss Adams professional.