Charitable IRA rollovers are back!
October 14, 2008
IRA Update from Ed Slott
October 14, 2008
Charitable IRA rollovers are back!
Tell your clients.
The provision allowing IRA owners over age 70 ½ to transfer up to $100,000 of their IRA directly to charity has been RETROACTIVELY extended through the end of 2009 (as if it never expired).
This provision was part of the massive bailout legislation officially known as the “Emergency Economic Stabilization, Energy Improvement and Extension, and Tax Extenders and AMT Relief Acts of 2008”
It is so far being referred to in the short version as
The “2008 Economic Stabilization Act”
H.R. 1424 was signed into law by the President on October 3, 2008.
What to tell clients right now!
If they are charitably inclined, then they should take advantage of this because it will cut their tax bill.
Let them know immediately before they take any remaining required minimum distribution (RMD) for the year. Remember that the transfer to charity satisfies their RMD, up to the $100,000 limit.
Example: If their 2008 RMD is $8,000 and they want to give $8,000 to a charity, then they should transfer (as a direct transfer) $8,000 from their IRA to the charity. That transfer satisfies their 2008 RMD. They do not have to include the $8,000 RMD as income (they also receive no tax deduction for the transfer to charity). The net result is that they will pay less tax than if they withdrew the IRA funds, included them in income and then donated the funds to charity and received a tax deduction.
They pay less tax because they do not have to include the RMD in income, which could subject them to increased taxes on Social Security, loss of tax deductions, credits and other tax benefits.
If they already took their RMD, then they cannot undo it. But if they want to give more to a charity, it is still best to transfer additional funds from the IRA, as opposed to giving other money (already taxed funds) to the charity. Tax deferred funds are the best funds to use for charitable donations.
Recap of the Qualified Charitable Distribution Rules
Effective for all of 2008 and 2009
The provision was retroactively reinstated on October 3, 2008
1. Only applies to IRA owners or beneficiaries age 70 ½ and over
2. Only applies to direct transfers of IRA funds to charities and not gifts made to grant makingfoundations, donor advised funds or charitable gift annuities
3. No split interest gifts of any type will qualify
4. For 2008 RMDs, Gifts must be made by 12/31/08
5. Applies to IRAs, Roth IRAs and INACTIVESEP and SIMPLE IRAs. It does NOTapply to distributions from any employer plans.
6. The charitable donation from your IRA will satisfy your required minimum distribution, but the IRA distribution is not includable in income.
7. You cannot take a deduction for the charitable contribution.
8. For a married couple where each spouse has their own IRAs, each spouse can contribute up to $100,000 from their own IRAs. If more than $100,000 is withdrawn from the IRA and contributed to a charity, there is no carryover to a future year. The excess is taxable income and a charitable deduction can be claimed if the taxpayer itemizes.
9. The contribution to the charity would have had to be entirely deductible if it were not made from an IRA. There can be no benefit back to the taxpayer
10. The distribution from the IRA to a charity can satisfy an outstanding pledge to the charity without causing a prohibited transaction.
11. The charitable substantiation requirements apply
12. QCDs apply only to taxable amounts. This is an exception to pro-rata rule. Only taxable amounts in a Roth IRA will qualify.
The provision is effective for all of 2008 and 2009.
P.S. Ed Slott & Company’s Next Exclusive 2-Day IRA Workshop, Instant IRA Success will be in Dallas, TX at the Westin Galleria on November 7-8, 2008. CLICK HERE for more information.
100 Merrick Road Suite 200E Rockville Centre New York 11570
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