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IRA Rollover

Charitable IRA Rollover

The “Tax Free” Gift

Questions and Answers, Video, and Resources

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The IRA Charitable Rollover allows individuals over age 70½ to directly transfer up to $100,000 per year from an IRA account to one or more charities. This transfer counts toward the minimum required distribution rule for IRA accounts, and such distributions are free of both income and estate taxes.

The IRA Charitable Rollover was first passed in the Pension Protection Act of 2006 and was in effect, through various extensions. The law is now permanenet.

Are Simplified Employee Pension plans, also known as the SEP-IRA eligible for the qualified charitable distribution?

The SEP-IRA is not eligible for the qualified charitable deduction. It is excluded under IRC section 408(d)(8)(B). It might be worth asking the donor if the employer is still making contributions to the plan. If the employer is not making contributions to the plan, then, it’s possible that the SEP-IRA has be rolled over to a traditional IRA as described in IRC section 408(d)(8). In that case, the donor may be able to take advantage of the qualified charitable distribution (QCD) rules to make his or her charitable gifts. Keep in mind that the donor has to be at least aged 70.5 and that there is an annual $100,000 limitation. The great news for your donor is that the QCD reduces income tax from taking the required minimum distribution. Start talking with your donors early in the year so they can count on this tax break when they file their taxes.

What’s the current status of the IRA Charitable Rollover? What should I be telling my prospects?

The IRA Rollover is now permanent.

My question has to do with the sample letter on the IRA rollover section on your website, and whether donors have the option to transfer appreciated securities directly from their IRA to a charity as a rollover, in addition to the option of using a check. There would not be any tax benefit, presumably, since they are not able to write it off their taxes. I have learned that the donor in question is planning to send a check – after instructing her broker to sell the shares to make the IRA gift. I also chatted briefly with a representative at [a major investment house] she thought transferring appreciated stock directly to a charity would qualify as an IRA rollover. What is your take on this?

Thanks for this interesting question. Three considerations…

  1. The donor is asking for legal/tax advice. Whether a donor can or cannot make a gift of cash or stock or any other asset to qualify as an IRA charitable rollover is not a question you can answer. You should only share information that there is a provision allowing distributions from retirement accounts to charity, which is what it says on your website. We don’t specify cash or stock so as not to get into that level of advice.
  2. Since an IRA Charitable Rollover would otherwise be 100% taxable if distributed directly to the owner from the IRA, there is no tax difference to the IRA owner either way, for an IRA Rollover or for a distribution if the transfer is made in cash or stock. There is a difference in transfer costs. If the stock is transferred to you, you have to pay to liquidate it. If the donor does the liquidation, you don’t incur that additional cost.
  3. I went back and looked at the statute (you have to go back to the Pension Protection Act of 2006 for the original language), and it indicates that the distribution would have to “otherwise qualify.” Not at all clear without more homework. Have your donor check with his/her own advisors.

Sorry not to be more helpful. My instinct is that it is fine. But without doing the research to know for sure, I would not give that advice. The code is often not logical. – Brian

Many donors bequeath cash, stock or other property to charity, and leave family or heirs the balance remaining in their retirements accounts. Are they doing the right thing? Is this a good idea?

The simple answer is “NO!” As a matter of fact, they would be much better off if they had reversed that asset distribution.

Retirement funds are often the most highly-taxed portion of an individual’s estate, often being subject to income and, in many cases, estate taxes as well. A much better strategy is to pass retirement funds to charity tax free, and reserve other, less highly taxed assets for passing on to heirs.

What are the details of the tax exposure of IRAs?

The IRS considers the balance left in your retirement account to be untaxed income. They term it “Income in Respect of a Decedent” (IRD), and if you bequeath that balance to your heirs, the IRS will subject it to both income and estate tax.

This potential double taxation (not to mention state inheritance taxes and possible Generation-Skipping Tax if the balance goes to grandchildren) can consume as much as 70 percent of the value of your account, leaving less than one-third to your heirs.

Are direct IRA Rollovers to charities tax-deductible as donations?

No, they are not tax-deductible as donations, but neither do they count as income that could trigger higher taxes or Medicare premiums. Put another way, although direct IRA Rollovers to charities are not tax deductible, they do enable you to shave your adjusted gross incomes in the face of higher tax rates on capital gains, ordinary income and dividends, and a new 3.8% Medicare surtax on investment income. These rollovers can be used as required minimum distributions.

A donor was told that he could reduce his income by the amount of the required minimum distribution (RMD) from his IRA gift made to the university. For example, if he made a 5K gift (RMD) he would reduce his income by 5K. Is it possible for the donor to make a tax deduction off the top of his income? Would this also be a charitable tax deduction? Would he take this out of income from his 1099?

Thanks for your question about QCD transfers from traditional IRA accounts. If a donor is aged 70.5 or older and they own a traditional IRA, they can ask the plan administrator to make a QCD to the charity of the donor’s choice. (Up to $100,000 annually). The distribution is exempt from income taxation and it goes against the required minimum distribution amount.

The distribution should come directly from the plan custodian and be made payable to the charity. This way, it will not be considered an income distribution and it will not be part of the 1099-R. The donor will receive an acknowledgement of the QCD from the plan custodian and they should receive a stewardship letter from the charity. There is no paperwork that an accountant would need to document the transfer.

Please note that the donor does nothing on his tax return to reduce his income.  In other words, there is no deduction.  His income will be automatically reduced by the fact that he did not have to take his full RMD for the year, which would, of course, be declared on his income tax return.  This will be apparent from the 1099-R he receives from the IRA custodian.  For instance, if his RMD is $50,000, and he gives a QCD of $5,000 to a qualified charity, then he would only report $45,000 of income, thus reducing his AGI, and his taxes.  Please keep in mind that if the donor has already received his full RMD for the year, then a QCD won’t help him.  This is the “first dollar out” rule.  Any money already received cannot be put back, as it were. His 1099-R will show $50,000 of income, and he will have to report the full amount of his RMD with no reduction.  This is why it is advisable to make QCDs as early in the tax year as is feasible.

The QCD is not tax deductible because the donor has not recognized the income. They should not receive the standard acknowledgement letter for charitable gifts from the charity. If the charity mistakenly sends an acknowledgement letter, the donor should send it back and not give it to their accountant. No double-dipping with QCDs.

A donor who makes a QCD can still make other charitable gifts from other assets that may qualify for a charitable deduction. Keep in mind that the QCD has nothing to do with other charitable gifts and does is not included in any kind of calculation for itemized deductions.

Camilyn K. Leone, Esq. is a legal advisor for PlannedGiving.com and a fundraising consultant for GG+A. She’s been a planned giving attorney and fundraiser for universities, museums and hospitals.

Resources

IRA Rollover Campaign

IRA Rollover Toolkit

Two brochures to have handy:
Bequests (a daily bread and butter piece) and Choosing an Estate Planning Attorney (a great networking piece)

Planned Giving Pocket Guide Includes Gift Comparison Chart (see layout)
Slip this handy booklet into your pocket before your next round of prospect calls. It's not another ways-of-giving brochure — it's a "why's of giving" that helps you better understand the upside and downside of different giving options for both you and your prospects.