IRA Opportunity

Act quickly.  This year and next, there’s a chance for people who are at least 70½ years old to donate funds from their individual retirement accounts (IRAs) directly to charities without incurring income tax on the donation.

Act quickly. This year and next, there’s a chance for people who are at least 70½ years old to donate funds from their individual retirement accounts (IRAs) directly to charities without incurring income tax on the donation. Section 1201 of the Pension Protection Act of 2006, P.L. 109-280, Aug. 17, 2006.

But those who are eligible this year must act before Dec. 31; and those who are eligible next year have until Dec. 31, 2007. After that, the window of opportunity slams shut—until Congress revisits the issue. (And how likely will that be in the run up to the presidential election in 2008?)

This so-called “IRA Charitable Transfer” allows those who are 70½ years and older to redirect up to $100,000 of their required minimum distributions (RMDs) to charity without being taxed. Because the transfer is not taxable, there is no charitable deduction.

The opportunity—made possible by the Pension Protection Act of 2006—is good news for clients who:

  • already donate the maximum tax deductible amount;
  • do not itemize deductions; or
  • have itemized deductions that are being phased out because their adjusted gross income is high.

The donation may be made from any individual retirement account or any individual retirement annuity. It cannot come from a simplified employee pension, nor from a simple retirement account.

Contributions must be made to a tax-deductible charity. They cannot go to a private (grant-making) foundation, a donor-advised fund nor, under Internal Revenue Code Section 509(a)(3), a supporting organization.

Before a client makes a donation, find out whether the charity qualifies. The IRA trustee or custodian will not do this for you. Each charitable organization receives a determination letter from the Internal Revenue Service. This determination letter specifies which section of the IRC applies to the charity. The strongest evidence you can obtain is a copy of the charity’s determination letter.

Also be careful: according to the wording of the Pension Protection Act, it’s not enough that the transfer occurs during the year a client turns 70½. To qualify, the IRA Charitable Transfer must occur on, or after, the date the donor actually is 70½. The IRS could soften this rule to include any transfer made anytime during the year age 70½ is attained, but hasn’t yet done so, and hasn’t indicated that it might.

So, for example, Rock and Roll Hall-of-Famer Jerry Lee Lewis (born Sept. 29, 1935) turned 70 years old on Sept. 29, 2005. That means he was 70½ on March 29, 2006. Jerry may make an IRA Charitable Transfer if he’s reading this now.

On the other hand, actor and country music star Kris Kristofferson (born June 22, 1936) turned 70 on June 22, 2006, so he won’t be 70½ until Dec. 22, 2006. Kris must wait until then to make an IRA Charitable Transfer.

And that famous New York curmudgeon/comedian/filmmaker/actor Woody Allen (born Dec. 1, 1935) won’t be 70½ until May 1, 2007. He will be able to make an IRA Charitable Transfer only on, or after, May 1, 2007.

To make a contribution, contact the intended charity to determine the exact payee name for the check. Then, using the correct payee name, direct the client’s IRA trustee or custodian to make a transfer from the IRA directly to charity. Many trustees and custodians already have forms and procedures in place to do this.

Warning: the donation will not qualify if the trustee or custodian makes the mistake of putting IRA money in a non-IRA account belonging to the client as an intermediate step. It also will not qualify if the check is made out to the client. The law does not provide a way to correct mistakes. The IRS has not addressed whether it’s okay for the check to be made payable to the charity but mailed to the client and delivered by the client to the charity.

Be sure that the client gets a letter of acknowledgment from the charity.

In addition to the IRA Charitable Transfer, clients still may give a percentage of their “contribution base” (generally, this is their adjusted gross income) to a qualifying charity. But remember: a client’s adjusted gross income will exclude his IRA Charitable Transfer.

Here’s an example: Jeff’s 2006 RMD is $120,000. His other adjusted gross income is $280,000. If he makes a 2006 IRA Charitable Transfer of $100,000, he needs to withdraw only another $20,000 to complete his RMD. Jeff’s contribution base is $280,000 plus his $20,000 taxable RMD, a total of $300,000. Jeff’s capacity for tax-deductible charitable giving to “50 percent” charities is $150,000 (his $300,000 contribution base, times 50 percent).

So get the word out to clients. There’s only about one month left for this year’s crop of eligible septuagenarians to take advantage of the 2006 IRA Charitable Transfer. And those who are turning 70½ next year may want to start thinking now about which charity they’d like to give to in 2007.

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