The Pension Protection Act of 2006 (PPA) included special provisions allowing certain persons to make direct transfers from Individual Retirement Accounts (IRAs) to charitable organizations. The law limited the transfers to those over age 70½ with traditional or Roth IRAs. The maximum that could be distributed per individual per year was $100,000. Theoretically, couples with sufficiently large IRAs could transfer up to $200,000 to charity on a tax-free basis.
Funds transferred in this manner did not qualify for a charitable deduction, but did avoid taxation, which was essentially the same as a 100% deduction for amounts transferred to charity. The funds transferred could not be used to create a gift annuity or other life income gift and had to be transferred in a way in which they would otherwise have been treated as completely deductible. These transfers also counted toward a required minimum distribution for the year. Unfortunately all of these provisions of the PPA of 2006 expired at the end of 2007.
IRA giving snapshot
Of the estimated $136.8 million in IRA gifts reported to the National Committee on Planned Giving as of January 17, 2008, the vast majority might be categorized as “larger” gifts. Only 1% of the dollar value of the transfers were $1,000 or less. Approximately one-half of the total dollars transferred came from distributions greater than $50,000. Some 75% came from transfers of more than $25,000, and more than 90% come from gifts of $5,000 or more, making the IRA rollover in practice a popular means to facilitate major current gifts.
The future of retirement plan giving
There are currently several proposals that would extend or expand the incentives for using IRA funds for charitable purposes in 2008. Even if such legislation fails to pass, however, IRA and certain other retirement funds still represent an attractive “pocket” from which to make charitable gifts during or after one’s lifetime. Given that most gifts under the PPA legislation were relatively large, it may be worth exploring ways it may still be possible to make relatively tax-efficient gifts using retirement funds.
In many cases, persons over the age of 59½ who itemize charitable deductions can achieve an outcome similar to the advantages that were offered by the PPA by simply withdrawing retirement funds and giving them to charity while claiming an offsetting charitable deduction. Because persons of this age can withdraw funds without a penalty for early withdrawal, depending upon the donor’s circumstances this can result in a “wash” or “near wash” for tax purposes. (More on this in next month’s Give & Take.)
IRA gifts in long-term plans
As far as estate gifts go, IRAs and other defined contribution plans such as 401(k)s or 403(b)s remain an excellent choice for many to use to fund charitable gifts at death. That is because the plan distribution may otherwise be subject to estate tax and any balance will also generally be taxed as income when received by a non-charitable beneficiary.
Regardless of the future of pending legislation to encourage IRA gifts, gift planners should continue to evaluate retirement plan assets as a source for charitable giving when appropriate, given the donor’s circumstances.