Charitable Tax Free IRAs

The Pension Protection Act of 2006, which President Bush signed into law August 17, makes it easier and more tax-efficient for donors to use IRAs to fund lifetime charitable gifts.

Because traditional IRAs are among the worst assets to leave to one’s children by way of inheritance, people 70 ˝ or older who make charitable gifts should consider funding these gifts via direct IRA distributions.

There are, however, several limitations on this “charitable rollover” to keep in mind:

1. Only IRAs are eligible. 401(k)s, 403(b)s, Keogh plans and SEP plans are not. An owner of a 401(k) or 403(b) could potentially roll that qualified plan into an IRA and then make qualified charitable distributions from the IRA.
   
   
2. A donor must have reached the age of 70 1//2 on the date the contribution is made in order to qualify. A distribution made even one day early would not qualify.
   
   
3. The distribution must be made directly from the IRA administrator to a qualified charity (not distributed to the owner and then reconveyed or endorsed over to the charity). Because distribution passes directly to the charity, it is never included in the owner’s adjusted gross income, and all potential adverse tax consequences (state and federal) are avoided. Fortunately, charitable distributions count toward satisfaction of the owner’s minimum required distribution.
   
   
4. Qualified charitable distributions are limited to $100,000 per donor per year, and are authorized only for tax years 2006 and 2007. Spouses could each contribute $100,000 from their respective IRAs.
   
   
5. The recipient charity must be a publicly supported 501(c)(3) charity described in 509(a)(1) or 509(a)(2) of the Internal Revenue Code, and not a private foundation or a supporting organization.
   
   
6. Contributions to donor-advised funds will not qualify, even if they are maintained at public charities such as community foundations. Contributions to other funds at community foundations will qualify.
   
   
7. Contributions may not be made in consideration for a charitable gift annuity or as part of a charitable remainder trust or charitable lead trust.

For further details, contact April Rouner at 319-354-5866 or ccf@mchsi.com.