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IRA Charitable Rollovers

You have done well for yourself.  You’ve watched your pennies, saved aggressively, invested wisely, and now, in your golden years, you have a retirement nest egg that is more than you need.  You have a philanthropic bent – an alma mater you’re fond of, a charity that is near and dear to your heart.  How can you donate to these worthy causes without sacrificing to the IRS more than you think it deserves?

An IRA charitable rollover is one way to do it.  In 2006, Congress enacted the Pension Protection Act.  One item in the act permits individuals to donate – or roll over – up to $100,000 from an IRA to an eligible charitable institution without recognizing those assets as income.  This means, in a nutshell, the amount rolled over isn’t taxed.

Before this act, one would need to withdraw the funds, pay the ordinary income taxes on the amount, and then donate the net proceeds to the charity.  With the enactment of this act, 100 percent goes to the organization.

While this act had an original time limit through the end of 2007, it has been extended a number of times.  The latest extension allows such charitable rollovers through the end of 2011.

There are rules, of course.  Individuals must be 70 ½ or older; this is the same age as when required minimum distributions must begin, and charitable rollovers count towards meeting this requirement.  Only eligible charitable institutions are acceptable.  The rollover must be completed before December 31, 2011, per the new extension.  Rollovers can be made only from IRAs, so if you have money sitting in a 401(k) or a 403(b) still, it would need to be rolled over into an IRA before making the charitable rollover.  And as stated before, rollovers cannot exceed $100,000; amounts more than this will be taxed as ordinary income.

There are also exceptions to the tax advantage of this kind of rollover.  Donor-advised funds are one example.  In a donor-advised fund, the donor makes recommendations as to how the money can be used.  The donor also cannot receive any gift of substantial monetary value in return for the donation.

The tax exclusion is also limited to public charities, for the most part.  To enable a charitable rollover to a private fund to qualify as a tax exclusion, the fund must elect to meet conduit rules in the year of distribution.  This means that the fund must pay out 100 percent of the funds received in its tax year by the 15th day of the third after the close of that tax year.  This is in addition to meeting its 5 percent distribution requirements.  Private funds elect whether or not to be a conduit foundation each year, so one year a charitable rollover may be eligible, and the next year not, depending on how the fund’s board of directors vote.

For a donation not eligible for the IRA charitable rollover exclusion, the amount of the donation from an IRA is considered a traditional distribution and will be taxed to the donor as ordinary income.   However, the donor can then take the charitable deduction on his/her itemized tax return, which would offset at least part of the tax increase (people who’s donation is eligible for the IRA charitable rollover exclusion are not eligible to turn around and use the amount as charitable deduction on their tax return).  There are limits to this deduction, of course.  The itemized deductions are limited to 50 percent of adjusted gross income for gifts to public charities, or 30 percent to private charities; allowed amounts of itemized deductions are also reduced by 3 percent of the amount that income exceeds a certain threshold.

IRA charitable rollovers are not for everyone. Those who could benefit from IRA charitable rollovers include:  people who don’t need or want to avoid receiving required minimum distributions; people who don’t itemize and would otherwise not receive any tax benefit for donating to charity; those who donate charitable gifts that exceed the 50/30 percent limits on adjusted gross income; people for whom Social Security income is taxable; residents of some states; and those who want to reduce their taxable estate.

If you think a IRA charitable rollover is something you’d like to consider, please consult your tax professional.

Wiser Wealth Management, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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