The good news is that this time when Congress extended the law at the end of 2015, it made the IRA charitable rollover “permanent.” That means it is a solid part of the tax law until some future Congress decides to change it again. But at least now there’s no fixed expiration date.
So after all that, what is the IRA charitable rollover?
The IRA rollover provision permits individuals age 70 and a half or older to make distributions directly from their IRA to a charity without having to report the distribution as taxable income.
The tax law requires an individual, upon attaining age 70 and a half, to take annual required minimum distributions from his or her IRA. Under this IRA charitable rollover law, direct distributions from your IRA to charity are included in the required minimum distribution amount but are not taxed.
What are the limitations?
Of course, when Congress gives a benefit, there are generally some limitations:
- This benefit applies only to individuals age 70 and a half or older.
- Qualifying distributions to charity are limited to $100,000 for the year.
- Only distributions from traditional or certain Roth IRAs are tax-free. The law does not apply to other qualified plans such as 401(k) and other employer-sponsored retirement plans. However, consult with your financial or tax adviser about the possibility of transferring funds from one of these other qualified plans to establish an IRA, with the distribution to charity coming from the newly established IRA.
- Only direct distributions to charity qualify as tax-free. The law does not apply, for example, to distributions in exchange for a charitable gift annuity or to a charitable remainder trust.
How does the IRA charitable rollover law benefit me?
Under prior law, any distribution from a traditional IRA and from some Roth IRAs was included in the individual’s taxable income. Using the distribution to make a gift to charity offset the tax impact to some extent, but only for those individuals who itemize tax deductions. However, at the same time, a taxable IRA distribution might increase taxation of Social Security benefits and limit deductions such as medical expense and other itemized deductions. The IRA charitable rollover law eliminates these unfavorable results of IRA distributions.
The law benefits individuals who do not itemize deductions, but instead claim the standard deduction on their tax return. Not including the IRA distribution to charity in taxable income is equivalent to a charitable contribution deduction.
Who should I contact to take advantage of the IRA charitable rollover law?
You should consult with your IRA custodian about the procedures for making direct gifts to charity under the IRA charitable rollover law. In order to benefit from the IRA charitable rollover law it is very important that the distribution from your IRA be made payable directly to the charity.
And, while this topic is fresh on your mind, ask your attorney and financial advisor how to make the Church a beneficiary of your IRA.
For more information on matters discussed in this article, contact Tom Scholler in the Archdiocese of Detroit Department of Development and Stewardship at (313) 596-7408 or email [email protected]. This article is for your information on stewardship, estate planning and planned charitable giving. It is not intended to be legal or tax advice. You should consult with your attorney, financial planner or tax adviser for the precise planning of the transactions suggested here.
