November 2011

Twists and Turns to Charitable Rollovers

Tax break for retirees still available in 2011

A federal tax law passed late in 2010—the Tax Relief, Unemployment Insurance Reauthorization,
and Job Creation Act—extended a unique planning opportunity for certain retirees. Under this
legislation, an individual age 70½ or older can transfer funds directly from an IRA to a qualified
charitable organization without paying any tax on the distribution.

Significantly, the “charitable rollover” counts as a required minimum distribution (RMD) for the
2011 tax year. Under the rules for RMDs, an individual age 70½ or older is generally required to
receive distributions each year.

Technically, the charitable rollover break expired after 2009. But the 2010 law reinstated the
provision retroactive to January 1, 2010, and extended it through December 31, 2011. In other
words, you have until the end of this year to take advantage of this tax provision.

Background: In the past, you could not directly transfer funds tax-free from an IRA to a
charitable organization. Instead, you were required to pay tax on the distribution, regardless of
your charitable intentions. The tax law also worked against retirees who wanted to use IRA
funds for charitable donations but no longer itemized their deductions.

The Pension Protection Act of 2006 (PPA) changed the rules for individuals age 70½ and older.
It allowed these retirees to transfer IRA funds directly to charity up to an annual limit of
$100,000. Although no tax deduction was allowed, donors were not taxed on the distribution,
either. The PPA tax break was subsequently extended through 2009. This provision was
extended again through 2011 by the 2010 legislation.

A qualified distribution is one from an IRA that would otherwise be taxable. The distribution
must be made directly from the IRA trustee to the charitable organization. In other words, you
cannot handle the funds and then transfer them to the charity’s coffers.

Furthermore, the contribution must qualify as a charitable donation. If the deductible amount
decreases because of a benefit received in return—a dinner at a fund-raising event, for example—
or the deduction would not be allowed due to inadequate substantiation, the exclusion is not
available for any part of the IRA distribution.

Under a special rule for charitable donations, the IRS treats distributions from an IRA funded at
least partially with nondeductible contributions as coming first from taxable funds and then from
nontaxable funds. Caveat: All of the taxpayer’s IRAs are grouped together for purposes of this
calculation. Therefore, you cannot single out just one account.

Finally, an IRA participant is generally required to begin receiving RMDs in the year after the
year in which he or she turns age 70½. A qualified charitable distribution counts toward this
requirement.

Be aware that the rules also apply to Roth IRAs. Roth IRA distributions to individuals older
than age 59½ are usually tax-free. But a portion of a distribution may be taxable for a Roth in
existence less than five years. If you have both a traditional IRA and a Roth IRA, it generally
makes sense to use the traditional IRA first for charitable distributions.

The charitable rollover break for retirees could be extended again by new legislation currently
being discussed in Congress. We will keep you posted and welcome your questions-- This e-mail address is being protected from spambots. You need JavaScript enabled to view it. .