Charitable Gifts Through Your IRA

The IRA Charitable Rollover will expire on December 31, 2011. Originally passed in 2006 as part of the Pension Protection Act, the IRA Charitable Rollover allows individuals age 70½ and older to make direct transfers totaling up to $100,000 per year to 501(c)(3) organizations, without having to count the transfers as income for federal income tax purposes.

• Who qualifies? Individuals who are age 70½ or older at the time of the contribution (you have to wait until your actual 70½th birthdate to make the transfer).
• How much can I transfer? $100,000 per year.
• From what accounts can I make transfers? Transfers must come from your IRAs directly to Chillicothe-Ross Community Foundation. If you have retirement assets in a 401(k), 403(b) etc., you must first roll those funds into an IRA, and then you can direct the IRA provider to transfer the funds from the IRA directly to Chillicothe-Ross Community Foundation.
• To what organizations can I make gifts? Tax exempt organizations that are classified as 501(c)(3) organizations, including Akron Community Foundation, to which deductible contributions can be made.
• Can I use the rollover to fund life-income gifts (charitable gift annuities, charitable remainder trusts, or pooled income funds), donor advised funds or supporting organizations? No, these are not eligible.
• Can I use the rollover to support a particular purpose of the Chillicothe-Ross Community Foundation? As with all other gifts, you can direct your IRA Charitable Rollover gift as you see fit. However, you cannot direct your gift for a purpose from which you receive a personal benefit, goods, or services in return, such as a gala ticket, to purchase items at a silent auction, etc.
• How will the Chillicothe-Ross Community Foundation count the gift? We will give you full credit for the entire gift amount.
• What are the tax implications to me?
  • Federal — You do not recognize the transfer to the Chillicothe-Ross Community Foundation as income, provided it goes directly from the IRA provider to us. However, you are not entitled to an income tax charitable deduction for your gift.
  • State — Each state has different laws, so you will need to consult with your own advisors. Some states have a state income tax and will include this transfer as income. Within those states, some will allow for a state income tax charitable deduction and others will not. Other states base their state income tax on the federal income or federal tax paid. Still other states have no income tax at all.
• Does this transfer qualify as my minimum required distribution? Once you reach age 70½, you are required to take minimum distributions from your retirement plans each year, according to a federal formula. IRA charitable rollovers count towards your minimum required distributions for the year.
• How do I know if an IRA charitable rollover is right for me?If you are at least age 70½ and
  • You do not need the additional income necessitated by the minimum required distribution, OR
  • Your charitable gifts already equal 50% of your adjusted gross income, so you do not benefit from an income tax charitable deduction for additional gifts, OR
  • You do not itemize deductions.
• What is the procedure to execute an IRA charitable rollover? To complete an IRA charitable rollover, the first step is to contact your IRA provider to learn their procedures. We also offer a sample letter you can send to your IRA provider to initiate a rollover. Make sure that you contact us when you direct the rollover so we can look for the check from your IRA provider.

IRA Charitable Rollover – Donor Profiles

IRA owners age 70½ or older may make a direct transfer to charity. The transfer may be up to $100,000 in one year. See Sec. 408(d)(8)(A). The IRA rollover first created by the Pension Protection Act of 2006 has been extended to the end of 2011.

Donor Profiles

There are five donor profiles for IRA rollover gifts. The first are the convenience donors who find it a very simple and easy method for an end of year gift. The second is the generous donor, who wants to give past the 50% of AGI limit. The third is a major donor. This person may be a board member or trustee who is looking for a favorable opportunity to make a major gift. Fourth, the Social Security recipient may reduce taxes with an IRA rollover gift. Finally, a standard deduction donor will benefit from a direct IRA to charity gift.

Convenience Donor

The majority of IRA owners delay taking IRA withdrawals until November or December each year. As the individual approaches the end of the year, he or she will need to make decisions. If an IRA owner is actively making gifts to charity during the year, then it may occur to him or her that this is a good opportunity to make a gift.

Convenience donors will contact their IRA custodians to arrange for the IRA charitable rollover. There is no charitable income tax deduction, but also no inclusion in federal taxable income. It is simply a very convenient way to help their favorite charity. Since the convenience donor may be a person with a small or medium value in the IRA, this probably will be the largest numeric category of donors.

Generous Donor

Some very generous individuals are already giving to the 50% of adjusted gross income level. This is the maximum permissible deductible level for cash gifts each year. The excess gifts may be carried forward and deducted over the following five years. Some of these generous donors may also have a large IRA. Since they frequently live at a moderate level in proportion to their income and assets, they may not actually need all of their IRA.

If there is a desire to give more, they can give to 50% of adjusted gross income from their regular assets and then make “over and above” gifts from their IRA. Some generous donors may in effect give 100% or more of income per year through this method. Since the IRA is not included in taxable income, it will have no impact on their regular income and other charitable gifts.

Major Donor

Board members, trustees and other major donors frequently are asked to make gifts of $100,000 or more. As the rules have continually become more favorable for IRAs and the required withdrawals have been reduced, large IRAs will continue to grow. Over longer periods of time, there are occasional market dips and drops, but the longer-term trend is positive and large IRAs will continue to increase in value.

For many professionals and business owners, the IRA may even become the vast majority of the estate. They have a need to do some “asset balancing” or there may be major future income tax problems. Therefore, it may be desirable for the major donor to give $100,000 per year to charity from his or her IRA. This has the advantage of “balancing” the estate assets.

In addition, there may be income tax benefits. If the donor were to take the IRA into his or her own personal income, there are several types of exemptions that are phased out at higher income levels. Thus, it may actually be preferable to make the gift directly from the IRA rather than making a charitable gift from regular income.

Social Security Donor

Social Security is subject to two levels of taxation. For donors who have income in excess of the first level, 50% of Social Security is taxed. For donors with income in excess of the second level, up to 85% of Social Security income may be subject to tax.

Withdrawing an amount from an IRA will potentially cause the recipient’s income to increase from the 50% taxable bracket to the 85% Social Security taxable bracket. Even though the withdrawn amount is given to charity and deducted, there still is taxation with the added 35% bracket. Thus, by making the transfer directly to charity, many Social Security recipients will save substantial taxes.

Standard Deduction Donor

Many seniors do not have a mortgage and their medical deductions are less than 7.5% of adjusted gross income. Thus, they may not have a sufficient level of deductions to itemize and choose instead to use the standard deduction.

If this donor withdraws $1,000 from his or her IRA and then gives it to charity, there is $1,000 of increased income with no offsetting charitable deduction, since the standard deduction is taken. Therefore, it will be preferable for all donors taking a standard deduction to make IRA gifts directly to charity and avoid the additional income tax otherwise payable.

IRA Gift Opportunities

The $100,000 IRA charitable gifts provision opens up many gift opportunities. Charities and allied professionals will want to explore all of these gift benefits with donors and clients. Everyone will appreciate the flexibility of IRA charitable gifts. As the age wave meets the IRA wave, there are major charitable giving opportunities ahead.

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