This week, we will take a break from the market and economic news to focus on some critical charitable IRA updates from the SECURE 2.0 Act passed in late 2022. There were two significant updates in the bill, the first which will impact the annual Qualified Charitable Distribution (QCD) amounts, and the second, a brand new program allowing for a one-time donation from an IRA for a charitable gift annuity.
To begin with, we’ll quickly clarify what a QCD is and how it works. A Qualified Charitable Distribution (QCD) is a direct transfer of funds from an individual’s Individual Retirement Account (IRA), payable directly to a qualified charity, as defined by the Internal Revenue Service (IRS). For those aged 70½ or older, these distributions can be counted toward satisfying their Required Minimum Distributions (RMDs) for the year, up to a limit of $100,000 annually. The key benefit of a QCD is the amount donated is excluded from taxable income, which might offer tax advantages for the IRA owner. It’s important to note that in order to qualify, the distribution must go directly to the charitable organization from the IRA without passing through the hands of the IRA owner.
With that out of the way, the first update to QCDs from SECURE 2.0 is the easiest to follow. Starting in 2024, the annual limit for QCDs is set to increase to account for inflation. While the exact amount of this increase is yet to be revealed, it is clear that the change will enable donors to contribute more significantly to their chosen charities. For those with large QCDs and the desire to donate to charity, this will allow for even more tax-efficient withdrawals.
The second and brand-new change pertains to expanding the definition of QCDs to include one-time distributions to create life income plans, specifically charitable gift annuities (CGAs) and charitable remainder unitrusts or annuity trusts (collectively, CRTs). The new provision is an exciting addition because it will allow someone to donate money to charity while receiving a lifetime income stream.
First, we’ll define a CGA. A charitable gift annuity is a contract between a donor and a charity promising to pay a fixed amount each year for life. The gift annuity contract is issued in exchange for a charitable contribution. The amount the charity will agree to pay depends upon the donor’s age at the time of the gift and does not change for the rest of their lifetime. The charity invests and manages your contribution, and the financial resources of the charity back your payments.
Per the updated legislation implemented in 2023, certain donors can execute a QCD in return for a charitable gift annuity. However, specific regulations and restrictions apply:
- This provision can be utilized only once during an individual’s lifetime and must be carried out within a single calendar year.
- There is a maximum cumulative limit of $50,000.
- All the proceeds you receive from your charitable gift annuity will be subject to income tax.
- Listing a spouse as a beneficiary of the annuity payment is permissible.
- Even though this contribution does not qualify for an income tax deduction, the QCD is not subject to taxation either.
Please let us know if you want to learn more about these new provisions; we’d be happy to discuss them.
Economy
- U.S. equity markets finished the first half of the year with a bang, with the S&P 500 up +2.3%, the Nasdaq up +2.2%, and the small-cap Russell 2000 up +3.7%. This brought the year-to-date numbers to a quite staggering +15.9% for the S&P and +31.7% for the Nasdaq, while the Russell lagged at +7.2% and the Dow Jones Industrial Average was up only +3.8%.
- U.S. GDP grew by an annualized 2% in Q1 2023, well above the 1.3% in the second estimate and forecasts of 1.4%. Consumer spending growth accelerated more than expected to 4.2%, the strongest in nearly two years (vs. 3.8% in the second estimate) despite stubbornly high inflation.
- Core personal consumption expenditure prices in the U.S., which excludes food and energy, matched market expectations and rose by 0.3% in May, easing from the 0.4% increase in the previous month. The yearly change, the Federal Reserve’s key gauge for inflation in the U.S. economy, rose by 4.6%, edging lower from 4.7% in April.
- Americans filing for unemployment benefits fell by 26K from the prior week’s 20-month high to 239K on the week ending June 24th, the sharpest drop since October 2021 and below market estimates of 265K. Labor market resilience will be a crucial metric for economic strength as interest rates remain elevated.
- The S&P CoreLogic Case-Shiller 20-city home price index in the U.S. fell 1.7% yoy in April 2023, the most significant decline since April 2012, compared to a 2.6% drop forecast. Compared to the previous month, housing prices were up 1.7%, a sign the housing market continued to strengthen in April.
Stocks
- U.S. equities were in positive territory. Real Estate and Energy were the top performers, while Consumer Staples and Healthcare lagged. Growth stocks led value stocks, and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased 8 basis points to 3.82% during the week.
- U.S. bond markets were in negative territory this week while International bond markets were positive.
- High-yield bonds led for the week, followed by corporate bonds and government bonds.
