Affluent seniors with bulging IRA portfolios have an opportunity to make substantial contributions to charitable causes in 2011, thanks to an extension of the IRA charitable rollover.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (The Act), signed into law by President Barack Obama on Dec. 17, retroactively extends the IRA charitable rollover from Jan. 1, 2010 through Dec. 31, 2011. Contributions for the 2010 tax year can be made through Jan. 31, 2011.
Congress passed the IRA charitable rollover in August 2006, in the aftermath of the Hurricane Katrina disaster, and allowed the rollover for every tax year after that through 2009, but did not do so for tax years 2010 and 2011 until the December lame duck session.
People aged 70-and-a-half and older must take a yearly minimum distribution from their retirement plans, which becomes part of their adjusted gross income (AGI), or face a substantial tax penalty. With the IRA charitable rollover, eligible seniors can contribute their yearly distribution directly to charitable organizations without counting it as part of their AGI and without paying taxes those gifts.
The extension of the IRA charitable rollover will be a boon for those who did not take their minimum distribution before Dec. 17 when it became law. However, those who did take a distribution before then will gain only partial relief. They will be able to put money they withdrew in excessof the minimumdistribution back into the IRA and then roll that money over to a charity.
The rollover can be an especially useful tool for certain wealthy seniors, according to Laura Malone (left), director of gift planning at American Endowment Foundation, a national public charity that administers donor-advised funds (DAFs).
- Seniors who have made the maximum 50% allowable charitable deductions of AGI and who want to give more can direct their IRA to transfer up to $100,000 to a charity in both tax years 2010 and 2011. This could mean up to a $200,000 rollover for individuals and $400,000 rollover for couples. They will, of course, forego a charitable deduction on their income taxes.
- Seniors with sizable IRAs may want to reduce the size of the retirement savings in their estates because inherited retirement distributions are usually taxed as income, and the tax hit on retirement assets can be substantial. In fact, Malone says, some seniors may choose to make most of their charitable contributions from their IRAs, thus meeting their giving goals while reducing the tax burden on their beneficiaries.
It is important to note that only traditional IRAs and Roth IRAs are eligible for tax-free treatment of charitable contributions up to $100,000, according to the philanthropic public policy and research organization Independent Sector. Charitable donations from other retirement plans or 401(k) and 403(b) plans do not qualify for tax-free treatment.
Further, distributions must be made directly from the IRA trustee to a public charity that is not a supporting organization. Contributions to donor-advised funds (DAFs) and foundations generally do not qualify. In order to be eligible for tax-free treatment, donors cannot receive any goods or services from the recipient charity. And they must obtain written confirmation of each IRA rollover gift from each recipient organization
Although DAFs are not eligible for charitable rollovers, administrators of these vehicles accommodate their clients in various ways. At American Endowment Foundations, a public charity with $185 million in assets, the administrator can help a clients set up what is called a “designated fund.” This is different from a traditional DAF in that it does not allow the donor to make changes in the organizations receiving money.
“You’re designating that money to go to one specific charitable organization that will not change,” Malone says. The advantage of this vehicle is that the donor can structure the gift’s distribution in a way that is appropriate to the specific charity rather than have the IRA administrator send one check. In addition, Malone says, “we are still allowing the donor to recommend their financial professional to work with AEF concerning the investment of the fund.”
Seniors with substantial retirement savings who do not expect to tap into those resources for living expenses have an opportunity through the end of this year to meet their philanthropic and estate planning goals by using the IRA charitable rollover. Whether that opportunity will return in 2012, or even become a permanent feature of tax law, remains uncertain.
For more on the IRA charitable rollover, including an important alert about 2010 rollovers, please see “Tax Alert: IRA Direct Contributions to Charities for 2010” on AdvisorOne.com