Last Updated: December 1, 2009
Individual Retirement Account (IRA) owners who are age 70½ and who are inclined to donate to charity, take note: The "Emergency Economic Stabilization, Energy Improvement and Extension, and Tax Extenders and AMT Relief Acts of 2008" include a provision that enables you to cut your tax bill and live generously through 2009. The provision, which was supposed to sunset in 2007, allows IRA owners over age 70½ to transfer up to $100,000 of their IRA directly to charity through the end of 2009.
Required Minimum Distributions (RMDs) were waived for 2009, but let's use this example. Let's say you own an IRA and you want to take a distribution of $5,000 and then donate that money to your favorite charity. You would simply transfer directly the $5,000 from your IRA to the charity. In a typical year (RMDs will most likely return in 2010), doing so would accomplish two things: you get to satisfy your RMD and your charitable inclinations. What's more, your get to exclude from income the $5,000 donated to your charity.
"The purpose of this tax planning strategy is to get pre-tax money directly out of your IRA and to a charity," said FPA member Michael Kitces, CFP®, publisher of The Kitces Report. "If you take money out of your IRA, it increases your income, and a subsequent charitable deduction doesn't always perfectly offset the tax impact. By donating directly to the charity from the IRA, you ensure that every penny of the donation is entirely pre-tax."
So what else do you need to know? According to Ed Slott, editor of Ed Slott's IRA Advisor, there are 12 items to consider:
- The provision only applies to IRA owners or beneficiaries age 70½ and over.
- The provision applies only to direct transfers of IRA funds to charities and not gifts made to grant-making foundations, donor-advised funds or charitable gift annuities.
- No split interest gifts of any type will qualify.
- Gifts must be made by Dec. 31, 2009.
- The provision applies to IRAs, Roth IRAs and inactive SEP and SIMPLE IRAs. It does not apply to distributions from any employer plans.
- The charitable donation from your IRA will satisfy your RMD, but the IRA distribution is not includable in income.
- You cannot take a deduction for the charitable contribution.
- For a married couple where each spouse has their own IRA, each spouse can contribute up to $100,000 from their own IRA. If more than $100,000 is withdrawn from the IRA and contributed to a charity, there is no carryover to a future year. The excess is taxable income and a charitable deduction can be claimed if the taxpayer itemizes.
- The contribution to the charity would have had to be entirely deductible if it were not made from an IRA. There can be no benefit back to the taxpayer.
- The distribution from the IRA to a charity can satisfy an outstanding pledge to the charity without causing a prohibited transaction.
- The charitable substantiation requirements apply.
- Qualified Charitable Distributions (QCDs) apply only to taxable amounts. This is an exception to pro-rata rule. Only taxable amounts in a Roth IRA will qualify.
"As always, you should consult with a tax professional and a financial planner to find out whether it's best to do this or make a donation as you normally would," FPA member Jeremy T. Welther, CFP®, a senior financial adviser with Brinton Eaton Wealth Advisors, said in a release.