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Newsletter - Spring 2007
Tax-Free Charitable Donations from Your IRA
Ann Byk, Manager, Tax & Business Services |
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Will you be at least age 701/2 between now
and the end of 2007? Do you have an IRA or a
Roth IRA? Would you like to make a significant
charitable gift in 2007?
If you answered "yes" to all three questions, why not consider a qualified charitable distribution from your IRA? Last August, President Bush signed into law the Pension Protection Act of 2006. Part of this law includes the qualified charitable distribution, also known as the IRA charitable rollover, allowing taxpayers to donate tax-free funds from their traditional or Roth IRA. These funds, which are distributed by the plan administrator, are completely tax-free and are excluded from one's adjusted gross income.
Prior to this law, if donors wanted to make a charitable contribution from IRA funds, they would have to first take the distribution from the plan and report it as taxable income. They would then donate the funds to charity, taking a charitable deduction for the amount as a Schedule A itemized deduction. More often than not, the charitable deduction is limited or phased-out, and the corresponding charitable deduction does not offset the IRA taxable income reported. This leaves the taxpayer with an out-of-pocket tax liability.
With the new law in place, using an IRA charitable rollover, the charity would reap the benefit of the full amount of the distribution. Donors can exclude the entire amount distributed directly from the IRA to the charity from their taxable income.
Gifts are tax-free up to $100,000 per taxable year per donor, and they may be counted as all or part of the minimum required distribution. The owner of multiple IRAs can make one or more distributions from one or more IRA accounts, as long as the total does not exceed $100,000 per year. Here are some additional considerations:
- All gifts must be made before January 1, 2008.
- Distributions must be transferred directly from the IRA to the charity. It is important that distributions never touch the donor's hands.
- The recipient must be an IRS-approved charitable organization. Distributions to donor-advised funds, charitable remainder trusts and charitable annuities are not permitted
- IRA holder must be 701/2 years of age or older.
- The qualified charitable distribution applies to only outright lifetime transfers from IRA owners; transfers cannot be made in trust.
In addition, distributions are restricted to either a traditional or Roth IRA; distributions from 401(k), SEP, KEOGH and Simple IRA accounts do not qualify. However, it may be possible to roll over a retirement account into a traditional IRA and then make a distribution from it. For further information, contact your retirement plan administrator.
Donors should be advised that if they choose to avoid the tax when they give away their money, they cannot “double dip” and also claim the charitable contribution deduction. IRA assets have not been taxed, so no deduction is allowed.
Needless to say, the IRA charitable rollover provides a win-win situation for both the charity and the philanthropic taxpayer.
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