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Make a tax-free rollover to a qualified charity

By D. Scott Emge, CPA, CFP

On Aug. 17, President Bush signed into law the Pension Protection Act of 2006. This is sweeping legislation that not only strengthens the retirement savings health of our nation but also sets forth many attractive charitable gifting incentives for charitably minded investors.

If you are age 70½ or older, you may roll over up to $100,000 in 2006 and 2007 tax-free from your IRA to a qualified public charity. The rollover amount will not be included in your gross income and you will not receive a charitable deduction for this donation.

How to handle your charitable donation correctly

Contact your financial advisor before making a donation to arrange for the proper transfer of funds from your IRA to the charity. You must authorize the financial institution where your IRA is held to send a donation directly to the charity either through a wire transfer or by writing a check made out to the charity.

You cannot write a check to the charity either from your IRA or from another account into which you transferred your IRA funds. Doing so would negate the tax-free transfer of the donation under the new rules because the amount would be considered a regular distribution and would then be added to your taxable income.

You must be age 70½ on or before the date of the charitable transfer. The charity must be a public charity but not a donor-advised fund or supporting organization and some other charitable entities. Check with your tax advisor to determine if the organization to which you wish to donate fits the definition of a “qualified” charity. You cannot receive anything of value in return for your donation, such as tickets to a charitable event, for example.

The exclusion from gross income applies only to distribution amounts that would have been includible in gross income were it not for this provision. If you have made non-deductible contributions to your IRA, have your tax advisor determine how much of the donation is considered tax-free under this provision.

Transfers to charities from other retirement plans, such as a SEP or SIMPLE IRA or a 401(k) or 403(b) plan, would not qualify under this provision. However, it may be possible to roll over funds from these accounts into a traditional IRA or a Roth IRA and then make an eligible transfer.

You can make distributions only up to $100,000 from your own IRA. If you are married, your spouse may make another qualified distribution from his or her IRA of up to $100,000 as long as all the other qualifications are met as well. This makes a married couple eligible for a total maximum contribution of $200,000.

The tax-free rollover of qualified charitable distributions can be particularly attractive for donors who need to take required minimum distributions from their IRAs. Under the new law, you can satisfy your required minimum distributions of up to $100,000 by making a tax-free qualified donation to charity using these funds. However, you must arrange with your financial institution to send these distributions directly to your charity.

In general, the new law also helps taxpayers living in states that do not allow itemized deductions / charitable income tax contribution deductions for state income tax purposes (e.g., New Jersey, Massachusetts and Connecticut).

For more information about how to take advantage of the new IRA-rollover-to-charities donation initiative and whether this technique is appropriate for you, contact your tax and financial advisors and the charity to which you want to donate.

D. Scott Emge, CPA, CFP, is a financial advisor with Smith Barney in Lutherville. He may be reached at (410) 494-1868 or scott.emge@smithbarney.com.

Smith Barney is a division and service mark of Citigroup Global Markets Inc. Member SIPC.

Citigroup Inc., its affiliates, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.