IRA Rollovers for Charity

By Anna Fridman

Prior to the Pension Protection Act of 2006 (the “Act”), the usual rules relating to the tax treatment of withdrawals from IRAs were applied to withdrawals from traditional IRAs or Roth IRAs that were donated to charities. Under the new law, for the years of 2006 and 2007, an individual age 70 ˝ or older can make direct charitable gifts of up to $100,000 per year from an IRA to a qualified charity and not have to report the IRA distributions as taxable income on his or her federal income tax return. Moreover, such distributions count toward the required minimum distribution.

There are several notable restrictions and specifications that apply to this new rule. First of all, the rule applies only to traditional and Roth IRAs. It does not apply to distributions from employer-sponsored retirement plans, profit sharing and other plans, including 401(k) plans, 403(b) plans, Keoghs, SIMPLE IRAs, and simplified employee pensions (SEPs). Therefore, a plan owner who has a non-qualified pension plan will need to roll over the non-qualified pension plan into a qualified IRA prior to making a distribution to charity in order to take advantage of the new law.

Furthermore, the distribution has to be made to a qualified charity and be distributed directly to the organization. Only public charities described in Internal Revenue Code 170(b)(1)(A), other than supporting organizations, qualify for such treatment. Distributions to donor advised funds of community foundations and private foundations will not receive the benefits of this new law.

The distribution from an IRA to a qualified charity will not be considered taxable income only if the entire distribution would be excluded. If the donor receives even the smallest benefit in connection with the transfer, the entire distribution will be included in taxable income. Therefore, if you distributed $200,000 from an IRA to a qualified charity, and received a $30 benefit in association with the distribution, the entire $200,000 would not qualify for the exclusion. The distribution from an IRA to a qualified charity has to be substantiated by a written acknowledgement that the charity received the IRA distribution and that the donor received no goods or services in connection with the transfer.

One of the other benefits of the new rule applies to individuals who made deductible and non-deductible contributions to their IRAs. Some plan owners make non-deductible contributions to their IRAs that, if withdrawn, would be considered a tax-free return of nondeductible contributions. Such distributions are not deemed to be qualified charitable distributions. However, the Act provides special new rules that are very favorable to taxpayers. Simply stated, taxable distributions are considered to be distributed first. This is different from the previous treatment of such distributions when the charitable distribution was viewed to be made prorata from both deductible and non-deductible contributions.

The new rule will be very helpful to those taxpayers who take the standard deduction and therefore do not get the benefit of deducting charitable contributions. Allowing direct gifts from an IRA to a qualified charity serves the same function as a charitable deduction.

The taxpayers who itemize their deductions will also benefit from this new rule if the amount of their desired charitable giving exceeds the adjusted gross income ceilings associated with charitable giving. Under the new law, and within the limitations described above, there will be a perfect match between the amount of the gift and the amount excluded from income, which will not always be the case if the taxpayer simply takes a charitable deduction.

Qualified charities have been actively promoting such distributions from IRAs as a great two-year opportunity for substantial income tax savings.

This new law becomes effective in 2006 and, unless extended, ends after 2007.

© 2006 Reish Luftman Reicher & Cohen. All rights reserved. The Trust & Estate Advisor Report is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.

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