The IRA Charitable Rollover – an innovative tax benefit for you and your designated charity
November, 2008
By
Darin Christensen
Tax incentives are one of the many benefits associated with charitable giving. Those benefits may be limited by deduction limitation rules if the donor chooses to make charitable gifts during their lifetime. The IRA Charitable Rollover is a creative way to donate to your favorite charity, escape the deduction limitation rule and derive additional financial benefits.
A traditional individual retirement account ("IRA") is a tax-deferred arrangement that encourages savings through tax-deductible contributions and tax-deferred earnings. After the age 70 ½, IRA owners must withdraw certain amounts every year regardless of whether such amounts are needed. These "required minimum distributions" ("RMD") are spread out over the owner's life expectancy and are deemed ordinary income to the IRA owner in the year received. The IRA Charitable Rollover provision ("Charitable Rollover") was enacted in August 2006 as part of the Pension Protection Act. Although the provision expired on December 31, 2007, it was retroactively re-enacted on October 3, 2008 in the financial rescue bill.
The Charitable Rollover is a tax efficient tactic that is great for the charitably inclined. In particular, the Charitable Rollover allows IRA owners to make outright charitable gifts directly from their IRA to qualifying charities without recognizing taxable income. As an additional bonus, these charitable distributions meet the "minimum required distribution" requirement.
Prior to the Charitable Rollover, distributions from an owner's IRA to a charity were treated as a distribution to the IRA owner followed by a contribution to the charity. As a result, the amount of the distribution was included in the owner's income, subject to taxation and the charitable contribution was subject to the percentage limitation rules that affect charitable gifts. Under the new Charitable Rollover rule, IRA owners at least 70 ½ years of age can make "qualified charitable distributions" from their IRA and exclude up to $100,000 per year from income. The $100,000 limit is for a single taxpayer, which means that a husband and a wife can give up to $100,000 from their own separate IRA accounts. Additionally, the charitable contributions are not subject to the charitable gift limitation rules. The rollover distribution must be made directly from the owner's IRA account to the charitable organization. The owner is prohibited from personally receiving any of the IRA funds. Also, the designated charity must be one that is properly qualified under the Internal Revenue Code. For example, qualified charities include religious, educational, literary, and scientific organizations, but not donor advised funds and supporting organizations.
The IRA Charitable Rollover offers you a unique opportunity to support your favorite charity while simultaneously deriving a significant tax benefit. If you are interested in learning more about the Charitable Rollover, determining whether your selected charity qualifies for the Charitable Rollover, or if you want advice on any aspect of a Rollover contribution including how the Charitable Rollover impacts your estate planning and wealth management plan, contact the Tax Group at Bullivant Houser Bailey for assistance.