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New Law Allows IRA Owners Over 70½ to
Donate RMD to Charity
The Pension Protection Act of 2006 allows IRA owners age 70½
or older to make direct transfers of up to $100,000 per year
from their IRA to a charity. The provision became available for
IRA distributions taken after Aug. 17, 2006 and applies only
through the end of 2007. Distributions can be made from taxable
funds in an IRA or Roth IRA, but not from employer plans or SEP
and SIMPLE IRAs. The distribution will not be taxable and there
is no charitable deduction allowed on the tax return. But the
provision allows those who want to contribute some of their IRA
funds to a charity during their lifetime to do so without having
to add the distribution amount to their income. This is better —
because you do get a charitable deduction if you take the IRA
withdrawal and report that amount in income. The reality,
though, is that it often doesn't offset perfectly, which is why
this new law is more favorable.
The direct transfer from the IRA to the charity can also
satisfy a person's required minimum distribution for the year.
If you are charitably inclined, it may be best to contribute
from the IRA, at least up to the RMD amount thereby avoiding
that amount being included in income. This will lower your
adjusted gross income (AGI) and might avoid or lessen the amount
of Social Security benefits that are taxed. The reduction in AGI
can also increase tax deductions, exemptions or credits that are
pegged to AGI either in terms of specified amounts or as a
percentage of AGI. The distributions are deemed to come from
income first if the IRA has non-deductible contributions. This
contrasts with the normal pro-rata rule that applies to other
IRA distributions where there are after-tax funds in the IRA.
If you want to take advantage of this provision for 2006,
then you must make a direct IRA transfer to the charity before
year end. The distribution must be made directly from the IRA
custodian/trustee to the charity. It cannot be distributed to
the IRA owner, who subsequently writes a check to the charity.
If that is done, then the provision will not apply and the
distribution will be taxable. However, you may be able to take a
tax deduction for the contribution (under the regular rules that
applied before this provision became effective). Finally, to
qualify for this provision, you must have documentation to
substantiate the donation (something in writing from the charity
showing the date and amount of the contribution, and certifying
that nothing of value was obtained in exchange for the
contribution). It is generally a good idea to send the charity a
letter notifying them of the amount of the contribution and
where the contribution is coming from as well as requesting
verification of receipt of the gift.
Charities must fall under IRS code section 170(b) to be
eligible. Donor advised funds, charitable remainder trusts and
private foundations are ineligible. The IRS has not yet provided
guidelines regarding coding for 1099 forms or 1040 reporting.
Until guidelines are published, many firms are relying on advice
from the Investment Company Institute. For instance, the IRA
owner is responsible for maintaining documentation to verify
with the IRS that requirements were met. The IRA owner is
responsible for verifying the charity is a qualified charity for
this purpose. The IRA owner is also responsible for verifying
their compliance with the annual limit of $100,000.
Most firms will report the distribution as a normal
distribution, but will advise the IRA owner to make a note of
"charitable distribution" on their records. The IRA
owner must provide instructions to waive withholding since the
distribution will not be taxable.
The IRA owner is responsible for any reporting the IRS
requires regarding the nature of the distribution. For most
securities-based accounts including mutual funds, the IRA owner
must obtain a signature guarantee on the request form since the
distribution is being sent to someone other than the shareowner
at the address of record.
It's a good idea to consult with your financial planner
before making your donation.
November 2006 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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