Pension Protection Act of 2006 provides nifty incentives to give
Nancy Hales
President
Community Foundation for Southwest Washington
If you are 70 and a half years of age or older and own a traditional or Roth IRA, you may want to take advantage of a new gift opportunity recently enacted into law. One of the provisions of the Pension Protection Act of 2006 is the "IRA Charitable Rollover," which allows you to make distributions directly from your IRA for philanthropy without the distributions being included in taxable income.
How does this work? Suppose you own $700,000 in an IRA and will be required to withdraw approximately $35,000 this year. Suppose further you would like to contribute $10,000 to several of your favorite charities. You can transfer $10,000 directly to your chosen charities and $25,000 to you.
Under the old rule, you would have had to declare all of the $35,000 withdrawal as income, with withholding taken out and, perhaps, income tax due. Under this new provision, the $10,000 distributed to charity is not income to you and will not be subject to tax or withholding.
Does this distribution count toward my mandatory withdrawal? Yes! The funds transferred from your IRA to charity count towards your mandatory withdrawal amount.
Does this gift qualify for a charitable deduction? No. When you roll over IRA assets to a charity under this provision, you do not include the amount in your gross income, and you would not take a charitable deduction for the contribution.
Are there limitations? As you might imagine, Congress did place some limitations on the type of gifts that qualify for this special treatment. Here is a recap:
• The gifts must be made outright, thus cannot be used to establish a gift annuity or fund a charitable remainder trust.
• They cannot exceed $100,000 per year.
• They cannot be made to a supporting organization (or donor advised fund).
• These tax-free distributions can be made only in 2006–2007.
Who should take advantage of this opportunity? This provision is especially advantageous for the following individuals who
• have significant IRA holdings and would like to make a charitable gift,
• are not able to deduct all of their charitable contributions because of deduction limitations,
• have a more modest income and adding the withdrawal to it would cause more of their Social Security payments to be taxable, or
• are required to take distributions but do not need them for living expenses — remember that funds transferred from your IRA to charity count toward your mandatory withdrawal.
What if I have a qualified pension plan and not an IRA? You may still be able to take advantage of this new law. You would first roll over your pension funds into an IRA, and then you would make your charitable distributions from the IRA.
And whatever your circumstances, the ability to make a direct distribution will be simpler than taking a personal withdrawal followed by a charitable contribution.
How can we help you? If you are interested in making a qualifying gift from your IRA, please contact me. I will be more than happy to answer any questions you might have. We are also able to help facilitate the transfer with your trustee.
As you consider your next charitable gift, remember to keep this gift opportunity in mind. It is time-limited, so the best time to make such a gift is now!
The Community Foundation stewards $50 million in charitable assets and awards $4 million per year back to the community. Nancy Hales can be reached at nancy@cfsww.org or 360-694-2550.
