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The IRA Rollover

Background
On August 17, 2006, H.R.4, the Pension Protection Act of 2006, was signed into law.  In addition to pension reform, the Act also contains several charitable incentives and reforms, including a so-called “IRA charitable rollover” incentive that allows individuals aged 70½ or older to exclude from their gross income gifts transferred directly from their IRAs to certain charities (including Clarkson) between now and December 31, 2007.  Most charities are hopeful that, if the law proves successful, future revisions may allow gifts from younger IRA owners and transfers to “split interest gifts” such as charitable gift annuities and charitable remainder trusts.

Qualifications
Rollover qualifications include:

• The donor (IRA owner) must be at least 70½ years old at the time a transfer (rollover) is made from the IRA to charity
• The transfer must be made from the IRA directly to a qualified charity
• A qualified charity is an organization described in section 170(b)(1)(A), other than an organization described in section 509(a)(3)
• Transfers may be made in taxable years beginning December 31, 2005, and taxable years beginning before January 1, 2008
• The combined value of all transfers made (whether to one or more charities) cannot exceed $100,000 per taxpayer per taxable year
• Transfers are not included in your adjusted gross income for federal income-tax purposes
• Transfers to charity may count as part of your annual mandatory IRA withdrawal amounts
• IRA transfers to charity are not taken into account in determining the deduction eligibility of other charitable contributions\

 

Cautions
There are several restrictions and issues to keep in mind:

• The transfer must be made from your IRA directly to charity, otherwise you must declare the distribution as income
• The IRA must be a traditional IRA or a Roth IRA; it cannot be an employer sponsored plan such as a SIMPLE IRA, a 401(k) or 403(b) plan, or a simplified employment pension (“SEP”) plan
• Distributions from Roth IRAs are not taxed to the account owner, so it is still wise to determine if some asset other than the Roth IRA is best to give to charity
• Transfers are not deductible as charitable gifts
• You may receive no benefit from the charity for your transfer (e.g. tickets, dinners, etc.)
• Transfers cannot be made to charitable gift annuities, charitable remainder trusts, or pooled life-income funds
• Transfers cannot be made to donor advised funds, private foundations, or “supporting organizations”
• The donor is responsible for and must obtain documentation for the transfer as he/she would substantiate any other gift to charity
• Transfers are made from otherwise taxable income first. Non-taxable income in your IRA may not be considered a qualified transfer and should be handled differently
• It is still unclear how (and if) various IRA administrators will implement the opportunity (e.g., charging fees for transfers, setting minimum transfer amounts, or maximum number of transfers per year), defining the process necessary to make transfers and establishing the eligibility of charities to receive transfers

 

Update, September 2007
The IRS recently issued Notice 2007-7 which includes clarification of Pension Protection Act provisions related to the IRA charitable rollover. Items in the notice include:

• Charitable IRA distributions can satisfy pledges
• A person over aged 70½, who is the beneficiary of an inherited IRA, may make charitable transfers from that IRA
• Charitable transfers may be made from a SEP IRA or a SIMPLE IRA if no employer contributions were made to the IRA in the year of the transfer
• A qualified charitable distribution is not subject to withholding of income taxes
• The maximum total qualified charitable distribution amount each year is $100,000 per person, not per household, or per IRA account.
• The IRA administrator may issue a check payable to the charity and present it to the donor to deliver to the charity. The gift date then becomes the date the donor mails the check via the USPS or hand-delivers it to the charity
• Transfers cannot be made from 401(k) plans, but it appears possible for a donor to move a portion of  the 401(k) into a Rollover IRA and then make a subsequent qualified charitable distribution from there if the IRA administrator allows it

 

Who might use this opportunity?
The “charitable rollover” provides a new method for using certain IRAs in philanthropic and financial planning:

• If you already give up to your 50% charitable deduction limit of your adjusted gross income, this legislation may allow you to, in effect, exceed that limit in 2006 and 2007
• If you have accrued a “carryover” of charitable deductions from past tax years, this legislation would allow you to make gifts without impacting those carryover amounts
• If your level of income causes a phase-out of certain deductions, a rollover may allow you to make gifts without increasing (and maybe even decrease) your adjusted gross income
• If you do not itemize your deductions, you may be able to make gifts from your IRA without increasing ( and maybe even decrease) your adjusted gross income
• It may simply be easier to make a transfer from your IRA to charity and not need to worry about the income-tax implications
• If the majority of your assets are in IRAs, it may be more convenient to make a direct transfer rather than reporting a withdrawal on your income-tax return
• If you’ve been thinking about making a larger gift, this may provide a tax-advantaged time-frame for doing it
• In some states (check with your advisor) a charitable deduction is not allowed for state tax purposes.  A rollover that does not increase your reportable income may result in savings on state taxes as well

 

For further information on the IRA Rollover contact Sal Cania.

Because everyone’s financial position is unique, it is important for donors to consult their tax counsel and plan administrators before making gifts to charity from their IRAs.

Please contact us if we can be of any assistance in this process.

 

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