Affluent seniors with bulging IRA portfolios have an opportunity to make substantial contributions to charitable causes in 2011, thanks to an extension of the IRA charitable rollover.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (The Act), signed into law by President Barack Obama on Dec. 17, retroactively extends the IRA charitable rollover from Jan. 1, 2010 through Dec. 31, 2011. Contributions for the 2010 tax year can be made through Jan. 31, 2011.
Congress passed the IRA charitable rollover in August 2006, in the aftermath of the Hurricane Katrina disaster, and allowed the rollover for every tax year after that through 2009, but did not do so for tax years 2010 and 2011 until the December lame duck session.
People aged 70-and-a-half and older must take a yearly minimum distribution from their retirement plans, which becomes part of their adjusted gross income (AGI), or face a substantial tax penalty. With the IRA charitable rollover, eligible seniors can contribute their yearly distribution directly to charitable organizations without counting it as part of their AGI and without paying taxes those gifts.
The extension of the IRA charitable rollover will be a boon for those who did not take their minimum distribution before Dec. 17 when it became law. However, those who did take a distribution before then will gain only partial relief. They will be able to put money they withdrew in excessof the minimumdistribution back into the IRA and then roll that money over to a charity.
The rollover can be an especially useful tool for certain wealthy seniors, according to Laura Malone (left), director of gift planning at American Endowment Foundation, a national public charity that administers donor-advised funds (DAFs).
- Seniors who have made the maximum 50% allowable charitable deductions of AGI and who want to give more can direct their IRA to transfer up to $100,000 to a charity in both tax years 2010 and 2011. This could mean up to a $200,000 rollover for individuals and $400,000 rollover for couples. They will, of course, forego a charitable deduction on their income taxes.
- Seniors with sizable IRAs may want to reduce the size of the retirement savings in their estates because inherited retirement distributions are usually taxed as income, and the tax hit on retirement assets can be substantial. In fact, Malone says, some seniors may choose to make most of their charitable contributions from their IRAs, thus meeting their giving goals while reducing the tax burden on their beneficiaries.
