Retired Military Finances 301: Just When You Thought The Tax Code Couldn't Get More Complicated

The SECURE Act changed several things when it comes to retirement accounts. It also put in place one of the most complicated rules pertaining to your Traditional IRA. It is the result of twp changes and one case of maintaining the status quo.

The SECURE Act changed the rules for contributing to a Traditional IRA after reaching the age at which Required Minimum Distributions (RMD) begin. Under the old law, you could not make contributions to a Traditional IRA after age 70 ½ (the age at which RMDs begin). If you had earned income, you could contribute to all other types of retirement accounts (as long as your income isn’t too high for Roth contributions) prior to the change. The SECURE Act brought Traditional IRAs in-line with other accounts. I think most would consider this a good change.

The SECURE Act also changed the age at which RMDs must begin. The age for RMDs changed to 72 (for those who didn’t turn 70 ½ prior to 1 Jan 20). I think most would consider this a good change too. But it did leave the potential for some confusion. Fortunately, Congress did address it.

Under prior law, you had the option at age 70 ½ to send some or all of your RMD to a qualified charity. If you did so, that distribution was not included in your income effectively making it tax deductible even if you don’t itemize (actually it is a bit better than an itemized deduction). This transaction is called a Qualified Charitable Distribution (QCD). The SECURE Act left the age at which you can make QCDs at 70 ½.

Enter the Complications

Congress sensed that there was space for abuse with contributions and QCDs in the same tax year. So, they put in a pretty complicated rule to rectify it. They stated that the excluded portion of QCDs must be reduced by the amount of any post age 70 ½ contributions made. As always, I like examples. Let’s take a look at Joe Bagadoughnuts. Joe turned 70 ½ on 1 Jan 20, so he doesn’t have to take any RMDs until age 72 . He does want to make contributions to his IRA (he is still working) and his buddy told him about QCDs and since he doesn’t itemize, he decides to do that too. Here is how it might work out for him

Year	Contribution	QCD	Excluded Amount
2020	$6,000	$5,000	$0
2021	$0	$5,000	$4,000 ($5K - $1K Leftover from 20)
2022	$0	$5,000	$5,000

What to Do About It?

The simplest solution is to not make QCDs in the same year that you’re make contributions to your Traditional IRA. Other options would include contributing to a Roth IRA and taking QCDs from a Traditional IRA as this doesn’t trigger the offset. On a related note, you generally don’t want to make direct contributions to charity from a Roth account. It isn’t very tax efficient. Or, you could contribute to a spouse’s Traditional IRA and take the QCD from your Traditional IRA.

Military Finances are Different

While this tax change applies to all tax payers, that isn’t always the case. There are a lot of wrinkles in the Tax Code that apply only to Veterans and Military Members. This is also the case when it comes to your benefits. We think you should work with a financial planner or advisor that works with people like you each and every day. If you’d like to chat give us a call or schedule a free initial consultation.

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If you found this article useful, you might like the following blog posts:

Mom (or Dad) Missed the Rollover Window for Her RMD. Now What?

Military Finances 201: Should Mom (or Dad) Skip an RMD?

Military Finances 301: Mom (or Dad) Missed Her RMD. Now What?