PPA 2006 ~ Charitable Gifts from Individual Retirement Accounts

The Investment Company Institute reported the nation's retirement assets topped $14.5 trillion in 2005, and of those dollars set aside in tax-deferred accounts, Individual Retirement Accounts (IRA) made up about 25% of the total.  For years, charitable organizations have been lobbying Congress to let donors make gifts from retirement accounts since almost everyone has cash saved in these highly regulated accounts. Until the Pension Protection Act of 2006  (PPA 2006) signed August 17th, charitable gifts from retirement accounts required that the donor take a taxable distribution, pay tax on the proceeds, write a check to the charity of choice and then take an income tax deduction on the tax return, assuming the donor actually itemized deductions. All along the way hurdles and traps discouraged donors from making this gift since the taxpayer's charitable deduction was limited to 50% of his/her adjusted gross income (AGI), and some states taxed IRA distributions but didn't offer a charitable deduction, so it actually cost money to give it away.

As older retirees approach the end of this year, those over 70½ have required minimum distributions that must be made or significant penalties will be assessed.  For this reason, as older donors assess their tax situation, both charities and financial services companies will need to spool up quickly in order to make these gifts a reality.  The good news is that charitable contributions made through the IRA will be available to satisfy minimum required distribution requirements

Under the PPA 2006, charitable gifts from IRAs are now possible and encouraged.  While there is no income tax deduction for most donors unless gifts are made from a Roth IRA or an IRA with non-deductible contributions, those situations probably won't be common.  However, because the donor will not have to recognize income, the net effect is the gift from an IRA becomes completely tax-efficient.  By keeping the AGI lower, the donor won't be penalized with higher self-employment or social security taxes, the taxpayer won't have to deal with the 3% phase-out of charitable deductions, there are fewer concerns about alternative minimum tax (AMT), and a donor can reduce taxes without having to itemize.

The major points of this planning opportunity are:

• Up to $100,000 from each donor's IRA is eligible for charitable giving.
• Distributions are made by the IRA custodian, in a trustee to charity transfer (few financial services firms will be prepared to accommodate donors in 2006, so start early and plan for delays). The donor should not take possession of the distribution.
• Gifts may be made from an IRA (a Roth IRA qualifies too) only, no SEP, 401(k), 403(b), SAR-SEP, SIMPLE accounts will qualify.
• IRA giving is only available in 2006 and 2007.
• The donor must be 70½ by the date of gift, unlike typical IRA required distributions that are made in the year in which IRA plan participants reach 70½.
• IRA gifts may be made only to public charities, no split interest gifts (e.g., gift annuities, charitable remainder trusts), and no use of supporting organizations or donor advised funds is allowed.
• Gifts from IRA assets, to the extent required, will qualify for required distributions.

This new law applies to lifetime gifts, and is especially beneficial for those who don't itemize, or who have Schedule A limitations due to previous gifts, or AGI limitations because there's not a large enough adjusted gross income to fully make use of charitable deductions. For donors uncomfortable with the idea of invading their retirement nest egg now, testamentary gifts of retirement plan assets and income in respect of a decedent (IRD) still make good sense for those with charitable intent in their estate plans.

© 2006 ~ Vaughn W. Henry

Vaughn W. Henry
Henry & Associates
Gift and Estate Planning Resources
22 Hyde Park
Springfield, IL 62703 USA
Phone: (217) 529-1958 ~ Fax: (217) 529-1959