What Should You Know about IRA Charitable Rollovers?

If you are over 70 ½, Congress made permanent in December 2015 your ability to make charitable gifts directly from your IRA. The Protecting Americans from Tax Hikes Act of 2015 made the charitable rollover provision permanent for 2016 and beyond using the rules established under the Pension Protection Act of 2006. While tax payers have been able to take advantage of this in the past, legislation was frequently approved in late December in a retroactive manner for that calendar year, making it tough to plan charitable giving.[1]

Why is this important?

Let’s think about an example:

A 73 year old has a required minimum IRA distribution in 2016 of $175,998. Federal taxes could total $69,695, assuming she is in the highest income tax bracket (39.6% federal and ignoring state), which leaves just $106,303 to spend or gift.

Let’s also assume she is charitably inclined and regularly gives $100,000 to her religious organization, her university, and various local charities. In the first scenario, she would have enough in proceeds to cover her annual gifts, with an additional $6,303 to spend.

On the other hand, she could make gifts from her IRA directly to the institutions that total $100,000. The $75,998 that remains from her Required Minimum Distribution would again be taxed at the highest income tax bracket, resulting in taxes of $30,095 and proceeds of $45,903. She has reduced her taxes by more than half and achieved her charitable gifting and yet has more after-tax proceeds to spend on an upcoming vacation to Saint Barths. This is what we call a win-win!

What’s the fine print?

• You must be 70 ½ or older at the time of gift.
• The gift must be made directly from an IRA administrator to a public charity.
• Know the gifting deadlines. Typically, the deadline for processing stock gifts is several weeks before year-end, so ask your Relationship Manager when deadlines for 2017 will be published.
• Total gifts per taxpayer are limited to $100,000.
• Qualifying accounts include all traditional IRAs and any Roth IRAs open for more than five years. Inherited IRAs qualify, as long as the owner/beneficiary is age 70 ½ at the time of the gift.
• No double dipping! Given the ability to avoid taxable income, the gifts are not tax deductible.
• Donors must not possess the IRA distributions during the process in order to avoid federal income taxes, which is why it is important for your IRA administrator to distribute these funds directly to the charities.

What’s excluded?

• Excluded accounts include SEP, 401(k), 403(b), SAR-SEP and SIMPLE SEP.
• Excluded gifts include income-retained gifts, such as charitable gift annuities, charitable remainder trusts and pooled income fund arrangements, donor advised funds, supporting organizations, and private foundations.

As year-end nears for 2016, ask your relationship manager and/or IRA administrator about making charitable rollovers in time for the December 31 cutoff.

[1] Note, this was approved by Congress so only applies to federal income taxation. State and local tax laws may or may not follow the federal rules.