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Planned Giving: Explaining the benefits of the SECURE Act

Matt Bredow

We can certainly agree 2020 has brought upon us a host of unexpected changes. Changes in the way we perform daily activities, how we do our jobs and how we relate with family, friends and strangers. Some changes may be temporary, others perhaps, here to stay. Tax legislation in 2020 has provided us changes as well, in the form of the SECURE Act. What does it mean and what do we need to know?

The SECURE Act (the Setting Every Community Up for Retirement Enhancement Act) is a comprehensive retirement and savings bill with several significant provisions that took effect Jan. 1, 2020 and may affect the goals within your financial strategy. The following are some of the highlights and what each potentially means to you:

¯ Required Minimum Distribution (RMD) age increases to 72 from 70 ½: If you were born on or after July 1, 1949, your RMD age is now 72. That being said, the recently enacted CARES Act waives all RMDs that were supposed to be taken in 2020. This adjustment in age provides for you more time to earn tax-deferred growth before distributions are required. Even though RMDs are no longer required until you reach age 72, the age at which you can take a Qualified Charitable Distribution (QCD) from your Traditional IRA will continue to be age 70 ½. A QCD is a nontaxable distribution from an IRA that is paid directly from the IRA to a qualified charity. This is a considerable advantage for those turning 70 ½ after the SECURE Act took effect. It allows more time for tax-deferred growth, but also an opportunity to take into account current circumstances and consider a QCD to a local nonprofit organization such as MidMichigan Health Foundation, while ultimately benefiting from the tax advantage.

¯ No age limit for contributions to traditional IRAs for those working past age 70 ½: For those working past 70 ½, you can now continue to make contributions and enjoy additional growth potential.

¯ Limited “stretching” for non-spouse beneficiaries – replaced with 10-year limit: Non-spouse beneficiaries used to have an option where they could “stretch” the RMD from an inherited IRA over their lifetime, allowing the potential for smaller distributions and more tax-deferred growth. With the SECURE Act, unless the beneficiary is an “eligible designated beneficiary,” distributions are required over a 10-year period. A Qualified Charitable Distribution in this scenario may also prove beneficial to individuals looking to limit their taxable income.

¯ Penalty-free distributions from retirement accounts for birth or adoption: Parents can take up to $5,000 of penalty-free distributions from their retirement accounts, including their IRAs, in the year following the birth or adoption of a child.

¯ Expansion of 529 education savings plans: A 529 plan account can now be used to cover costs associated with registered apprenticeships and for up to $10,000 in qualified student loan repayments, without federal income tax and penalties. State laws may vary in their treatment of these expenses.

A “secure” retirement is what we all work for and these highlighted portions of the SECURE Act bring to your attention some of these new provisions within it. In addition to the SECURE Act, the CARES Act, also signed into law in 2020, has additional features that can have considerable effects on your financial strategy. A law designed to help provide financial stability and relief for individuals and businesses affected by COVID-19 also allows for enhanced tax benefits for charitable gifts. Under this law, you have the ability for an above-the-line deduction of up to $300 of cash contributions to charities, for those individuals who do not itemize. In addition, there are changes to limits on charitable contributions. For individuals, those who itemize their deductions for charitable giving, the 60% of adjusted gross income limit for cash gifts is suspended for 2020. For corporations, the 10% limit on charitable contributions is increased to 25% of taxable income.

With the end of a unique year approaching rapidly, we find ourselves afforded with great opportunity. MidMichigan Medical Center – Alpena is advancing itself with leading edge technology and patient care, while new legislature is providing us retirement strategies and tax advantaged avenues for us to participate in the future of healthcare for our area. Consult with your financial advisor and tax professional on how you can leverage these opportunities to your advantage.

Matt Bredow is a financial advisor and member of MidMichigan Health Foundation’s Planned Gifts Committee in Alpena.

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