Charitable IRA rollover: A limited time offer
Last year's tax relief legislation extended several expiring tax breaks, including tax-free treatment of charitable IRA rollovers – formally called “qualified charitable distributions” – by taxpayers age 70-1/2 or older.
If you’re eligible, you have until the end of this year to transfer up to $100,000 tax-free directly from an IRA to an eligible charity. (The $100,000 limit is per person. Thus, if your spouse is similarly eligible, he or she can also make a contribution. ) You can use a charitable IRA rollover to satisfy your 2011 required minimum distribution (RMD) and enjoy estate planning benefits as well.
Charitable IRA rollover requirements
To qualify for a charitable IRA rollover, in addition to meeting the age requirement, you must:
• Transfer the funds directly from the IRA to an eligible charity (donor-advised funds, supporting organizations and private foundations are ineligible), and
• Document the rollover with the same type of written acknowledgment from the charity that you would need to support a charitable deduction on your income tax return.
The distribution to charity must be one that would be fully deductible (without regard to percentage-to-income limitations) if you made the donation yourself. In other words, you can’t receive something of value in return.
In addition, the distribution must be one that would otherwise be taxable. That rules out most Roth IRAs. A distribution from an IRA that’s part of a Simplified Employee Pension plan or a Savings Incentive Match Plan for Employees also won't qualify.
Determining whether you'll benefit
There’s little point in going to the trouble of arranging a charitable IRA rollover if it won’t provide a tax benefit. You may be able to achieve the same result by taking a taxable distribution from your IRA, donating it to charity and claiming an offsetting charitable deduction on your income tax return. In fact, you can potentially do this even if you haven't reached age 70-1/2.
But a charitable rollover can provide a tax advantage if:
• You’d exceed the annual charitable deduction limit - generally 50% of adjusted gross income (AGO – if you made the contribution yourself,
• The increased AGI resulting from a taxable IRA distribution would cause adverse tax consequences, such as reduced deductions or exemptions or increased taxes on Social Security benefits, or
• You live in a state that allows tax-free charitable IRA rollovers for state income tax purposes but disallows deductions for charitable donations. (Even if you live in a state that doesn’t recognize charitable IRA rollovers, in most cases the federal tax benefits will far outweigh the state tax cost.)
Also consider the potential estate planning benefits: Traditional IRAs can be costly inheritances because the beneficiaries will owe income taxes on the distributions they receive. If you instead donate your traditional IRA assets to charity and bequeath Roth IRAs or investments held in taxable accounts to your loved ones, income taxes will take a smaller bite out of their inheritances.
A valuable opportunity
If you’re charitably inclined, over age 70-1/2 and have a significant balance in an IRA, check with your tax advisor to see whether a charitable IRA rollover would be worthwhile. Under the right circumstances, a rollover can produce substantial tax savings. And keep an eye on Congress. Lawmakers have extended the charitable IRA rollover twice before, and they may extend it again.
are a wealth management and estate planning firm specializing in estate
and trust planning, income tax planning, philanthropy and asset management.