Coming in at almost 1,000 pages, even policy geeks might find themselves challenged by the Pension Protection Act of 2006. There is a lot there. The new law significantly impacts pension and savings plans, deferred compensation plans, employer-owned life insurance, 529 college savings plans and long-term care. The law serves many purposes, several of which may be important to your clients. So it’s well worth taking the time to show how the law provides them with a valuable tool to use in planning for retirement.
Among its many provisions, the act creates a new planning opportunity affecting those who want to use IRA funds to make a charitable gift. In a nutshell, the law allows tax-free “gift” distributions. However, this opportunity is short-lived, lasting only through the end of 2007.
Every time a financial professional makes contact with a client, there exists a valuable relationship-building opportunity to educate the individual. In this case, time is of the essence. Here’s a summary of the law creating the charitable IRA rollover.
The old law
Before the new law was enacted, if an individual wanted to use IRA funds to make a charitable gift, he or she would need to withdraw the funds as a taxable distribution (subject to a 10% penalty if under age 59 1/2 ) and then make a gift to charity.
This would result in income and a charitable contribution as an itemized deduction. And though one might conclude that the income and deduction would offset each other, this wasn’t always the case, due to:
? Adjusted gross income limitations on the amount of charitable contributions allowed as an itemized deduction.
? The phase-out of the itemized deduction.
In simple terms, the old law created a tax burden.
The new law
The new law allows individuals 70 1/2 or older to make a lifetime gift of IRA funds directly to a qualified charity without including the amount in income or taking a charitable deduction.
Some other key points to the new law:
? The maximum gift is $100,000 per year for each of 2006 and 2007.
? The IRA trustee must make the transfer, which means the funds must not touch the donor’s hands.
? Contributions count toward the required minimum distribution for a donor’s IRA accounts.
? If the IRA has any basis, the contribution is deemed to come first from the taxable portion. If any portion is non-taxable, the individual can count that amount as a charitable contribution and take it as an itemized deduction.
? The entire payment must be made as a charitable contribution. If the donor receives a benefit (for example, a $5,000 donation to attend a dinner where the cost of the dinner is $75), none of this payment qualifies.
? Gifts from retirement accounts other than IRAs (for example, 401(k) or SEP accounts) are not eligible.
? Eligible recipient charities generally include all public charities, though the law expressly excludes donor-advised funds, charitable remainder trusts and supporting organizations.
While the provision affecting charitable giving is short-lived, the change in the law is most likely to benefit those individuals who:
? Don’t itemize, since, under the old law, they would have included the distribution income without any deduction; under the new law, they do not include the amount in income.
? Do itemize, because the income exclusion keeps their adjusted gross income lower, which translates to a potential increase in itemized deductions and personal exemptions if they are phased out and a lower floor for medical expenses (7.5% of adjusted gross income), non-business casualty losses (10%) and miscellaneous expenses (2%).
? Don’t need their required minimum distribution. This change lowers their tax liability and the charitable contributions lower the account value, which in turn reduces future required minimum distributions.
? Receive Social Security benefits. It may help to keep income low enough to decrease or eliminate the portion of Social Security benefits subject to income tax.
? Live in states without state charitable deductions. This will lower individuals’ taxable income while still allowing them to make charitable contributions.
? Make charitable gifts greater than the 50% adjusted gross income limitation. A charitable IRA Rollover will garner a tax benefit without being subject to this limitation.
Clearly, the Pension Protection Act of 2006 provides new opportunities in charitable giving. However, other types of charitable gifts may provide your client with better tax benefits. In any discussion of depth on these issues, it’s prudent to include experts in the conversation. Your client will appreciate it.