Q: I turn 70½ this year so I was going to start making my charitable donations from my IRA but now I hear the magic age for required distributions is 72 so I’ll have to wait. I still work some. Is it true that the law now allows me to keep making contributions to my IRA after 72 too? I like the deduction.
A.: Ken, yes, the SECURE Act passed in late 2019 allows workers who have reached the age for Required Minimum Distributions to make contributions to traditional IRAs. Before the SECURE Act, a worker of that age could only contribute to a Roth IRA or a workplace retirement plan like a 401(k).
There are some twists you should be aware of, however. You will still be subject to Required Minimum Distributions (RMD) from traditional IRAs at 72 even if you are contributing to an IRA then. This differs from an individual’s Roth IRAs which are not subject to RMD or a 401(k) that includes a provision to exclude active workers from RMD.
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Contributing to a traditional IRA while being subject to RMD means you avoid some taxable income via the contribution but incur taxable income due to the RMD. You mentioned you can deduct your contributions so contributing could still reduce your tax bill, nonetheless.
However, your charitable intent brings up yet more twists. First, the simple twist. While the SECURE Act changed the age that RMDs start, it did not change the eligibility rules for Qualified Charitable Contributions (QCD). You may commence those direct donations to qualified charities from you IRA the day you turn 70½ even though RMD will not start until you are 72.
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Done correctly the check is made payable to the charity and you report the donation as a nontaxable portion of the distribution listed on the Form 1099-R you will receive come tax season. You can give to as many charities as you want every year in this way if the total of all such donations is $100,000 or less each year. A QCD can count toward your Required Minimum Distribution.
The second twist represents a conflict for you, Ken. If you make a deductible IRA contribution after age 70½, it can wipe out some of the tax benefit of making QCDs. For example, if you make a $7,000 deductible contribution to your IRA, the first $7,000 of QCDs are not tax-free distributions. You may still get some tax benefit from such donations as an itemized deduction but that depends on what else can go on your Schedule A. If you do not itemize, there is no tax benefit to a QCD that is taxed due to a deductible IRA contribution.
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This effect carries with you for life. Meaning if you make $30,000 of deductible contributions to your IRA after age 70½, the first $30,000 of QCDs you make after those contributions will still be included as taxable income to you regardless of what tax year those donations are made.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Dan Moisand is a financial planner with Moisand Fitzgerald Tamayo. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.