How To Make A Sizable Charitable Donation From Your IRA Tax Free
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
How to Make a Generous Charitable Donation from Your IRA Tax-Free
If you're over 70 years old, eager to support a charitable cause, but your only liquid asset is your IRA, I have great news for you.
On August 17, 2006, the Pension Protection Act of 2006 (PPA 2006) was enacted, introducing the most significant changes to pension law in three decades.
Real-Life Scenarios
Consider Roger and Claire, a retired couple. Roger, who spent his career in the aerospace industry, built a substantial 401(k) that grew significantly during a bullish market period. He later converted it into an IRA, which became their primary asset.
They are avid supporters of the Humane Society, which is expanding its local chapter with a new wing. They wish to donate between $50,000 and $100,000.
Now, meet Bill and Diane. Bill dedicated 40 years to teaching, and after a military career, he also worked in the private sector. This couple, too, has a sizeable IRA.
Upon turning 70, Bill had to start taking minimum required distributions (RMDs) from his IRA. However, they don't need this income due to other financial resources and must pay taxes on these RMDs.
Actively involved in their church for 45 years, Bill and Diane wish to help pay off a new church organ purchased on credit.
Prior Hurdles
Before the PPA 2006, Roger, Claire, Bill, and Diane faced obstacles in using their IRAs for charitable giving:
1. Their primary liquid asset was their IRA.
2. Withdrawing large sums incurred ordinary income tax.
3. Charitable contribution deduction limits might still result in taxable income from IRA withdrawals.
How PPA 2006 Helps
Thanks to the PPA 2006 provisions, both couples can now make tax-free donations from their IRAs. Here’s how:
1. Eligibility: You must be at least 70½ years old.
2. Limit: You can donate up to $100,000.
3. Timing: Originally applied to 2006 and 2007.
4. Direct Transfer: Funds must be sent directly from your IRA custodian to the charity.
5. RMD Coverage: These gifts count toward your required minimum distribution for the year.
6. Restrictions: Not applicable for donor-advised funds or supporting organizations, though some community foundation funds qualify. Check with your charity.
7. Pure Gift: No strings attached, like event tickets, are allowed.
8. Income Reporting: No need to report the donation as income.
9. No Deduction: You won't receive a charitable deduction for this gift.
This law is beneficial. In these examples, the Humane Society can expand, and a church can clear its debt, all thanks to IRA donations. Extending this law beyond 2007 would be advantageous.
Spread the Word
Given the late implementation in 2006, many missed opportunities for IRA rollovers that year. Share this information with anyone who might benefit. Public charities should inform their planned giving officers to promote this option.
Remember, always consult your tax advisor and the charity to ensure compliance with all requirements and proper execution of your gift.
You can find the original non-AI version of this article here: How To Make A Sizable Charitable Donation From Your IRA Tax Free.
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