IRA Distributions Directly to Charity
Congress recently passed the Pension Protection Act of 2006 (the PPA), which included some of the most sweeping changes to retirement plans in 30 years. It was primarily designed to help companies strengthen their pension plans, but the PPA enacted several provisions that may benefit you. One allows you to make qualified charitable distributions totaling up to $100,000 per year directly from a traditional or Roth IRA to qualifying charities. This new provision is available for such distributions made from Jan. 1, 2006 through Dec. 31, 2007.
Q. What are the benefits to using a qualified charitable distribution?
A. Qualified charitable distributions don't count against your deduction limits for charitable contributions. This means that the qualified charitable distributions can be made in addition to other charitable contributions. Plus, a qualified charitable distribution is not included in the account holder's income. As a result, it doesn't increase the taxpayer's annual modified adjusted gross income (MAGI). Because the distribution is not included in MAGI, this may benefit you. If MAGI is above certain limits, a person's ability to take certain itemized deductions on their tax return may be limited. Increased MAGI may also affect whether a person's Social Security benefits are taxable.
Q. Does the donor also get to take an allowable deduction for a contribution?
A. No. Since the donor doesn't include the amount in his or her income, the individual doesn't receive a deduction for a qualified charitable distribution.
Q. How does this affect the donor's required minimum distributions (RMD)?
A. A qualified charitable distribution can be used to satisfy the annual RMD from a traditional IRA by treating it as if it had been paid directly to the owner of the account.
Q. Who is eligible?
A. In order to make a qualified charitable distribution, the IRA holder must be age 70 1.2 or older when the distribution is made and it must be made directly from the IRA to the charity.
Q. What accounts are eligible?
A. A "qualified charitable distribution" can be made from a traditional or a Roth IRA, but not from employer-sponsored retirement plans, including SIMPLE and SEP IRAs.
Q. What are qualified charities?
A. Generally, a qualified charity includes most public charities, including religious institutions, certain veterans' organizations, fraternal societies, and community foundations that provide scholarships. The charity also must be one to which deductible contributions may be made. The donor can't receive any benefit from a qualified charitable distribution, for example tickets to an event or fundraiser. You should always check with both your tax advisor and the charity as to whether it qualifies.
The new provisions may give you an opportunity to make a charitable contribution that you might otherwise not have been able to make. If you want to make large charitable contributions, you should consult your tax advisor and estate planner.
