Act Now to Take Advantage of the IRA Rollover

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Take Advantage of the IRA Rollover, a provision that allows for Tax-free Charitable Transfers from IRAs

Congress has enacted H.R. 5771, which enables individuals to transfer voluntary or mandatory distributions from a traditional or Roth I.R.A. directly to charity.  Transfers must be made by December 31, 2014 to receive tax benefits.

These withdrawals for charity are excluded from one’s income, so taxes are not paid on the withdrawal.  Because the withdrawal is not taxable income, the taxpayer cannot take a charitable deduction.

The law targets age 70 1/2+ taxpayers who may find that:

  • their deductions have reached the maximum that can be deducted;
  • increases in income have caused more of their Social Security benefits to be taxed, or triggered the Medicare tax;
  • they are not in a position to fully benefit from charitable deductions; or
  • their estates would likely be subject to tax if these assets were left to loved ones other than a spouse.

Under these circumstances, an IRA may be a desirable vehicle for a charitable gift in 2014, when any amount up to $100,000 may be contributed tax free.  A couple with separate IRAs could each give up to the $100,000 maximum tax-free by the December 31, 2014 deadline.

This legislation is meant for individuals, who are most likely already giving substantial amounts to charitable organizations, to create a tax advantage by shifting giving from a different source of income.  It is in no way meant for individuals to give up IRA income that is needed to meet their living expenses, and seniors should be wary of any organization that asks them to do so.  Split-interest gifts and gifts to donor-advised funds, supporting organizations, and private non-operating foundations, as well as funds accumulated in 401(k), 410(b), or other types of retirement vehicles do not qualify.

Before contributing funds to charity from an IRA, individuals should check with their tax advisors.  In most cases, charitable gifts of appreciated stock, mutual funds, or real estate provide greater income tax advantages to the donor during his/her lifetime, while IRAs yield greater tax benefits as charitable gifts in one’s estate plan.

For larger estates, a good portion of IRA wealth goes to estate taxes and income taxes of beneficiaries.  Experts report that after taxes are paid, heirs may receive as little as 25% of IRA assets that pass through estates.  IRA assets transferred directly to charity are not taxed, preserving the full amount for charitable purposes.

Additional information can be obtained from your financial advisor or the Lenawee Community Foundation at (517) 423-1729 or contact Sue directly.