A Foolish Treat: Charitable IRA Rollovers

You don't have to go trick-or-treating to take advantage of The Pension Protection Act of 2006. This legislation temporarily modifies required minimum distribution rules, giving taxpayers something better than candy: cash.

How does it work? If taxpayers make "qualified charitable distributions" of $100,000 or less from a Roth or traditional IRA, the distributions are excluded from gross income for 2006 and 2007. No gross income means no taxes.

This exclusion applies solely to taxpayers who are 70 1/2 by the date of the distribution. Only distributions from Roth and traditional IRAs qualify; distributions from other retirement plans are excluded. But be careful, since not all charities qualify. Donor-advised funds and supporting organizations do not qualify, even if the supporting organization is maintained by a qualified charity. The qualified charitable distribution cannot be directed toward any type of charitable gift annuity or charitable trust, nor can there be any "quid pro quo" arrangements between the donor and the recipient. And remember not to have those checks sent directly to you. Simply endorsing the check to the charity will not pass muster, since the IRS will view that as constructive receipt.

This legislation, also known as an IRA Charitable Rollover, has the potential to eliminate the tax friction that occurs when a taxpayer uses distributions from an IRA to make a charitable contribution. Seniors with other income sources often find that a required minimum distribution affects the taxation of Social Security benefits, the deductibility of medical expenses, and the phase-out of itemized deductions, while increasing the application of the alternative minimum tax. Boo! That's scary! But with the new law, charitable giving should be much easier now.

The technical language is quite clear: The onus will be on the taxpayer to establish sufficient substantiation from the charity. Contact the charity prior to making the distribution, and make sure your IRA custodian identifies you as the donor. Be aware that the distribution process will be at the discretion of the plan custodians. They may limit the number of charities to which you can contribute, or require a minimum amount per charity.

Non-itemizers with a charitable intent will get the biggest treat from this new law -- a tax break, at last. With proper planning, taxpayers can use a charitable IRA rollover to direct pre-tax money to a charity with the net effect of lower taxes. Sweet.

Charitable IRA rollovers are brand new, so discuss your situation with a financial professional who is familiar with this new legislation.

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Fool contributor Buz Livingston, CFP, appreciates your feedback. He believes investors benefit from professional advice, and he enjoys kayaking in the Gulf of Mexico.

The Motley Ghoul's Tricks or Treats represents the opinions of each Fool only and should in no way be taken as the opinion of either The Motley Fool, Inc., or any company in question, or as representative of anyone or anything other than that specific Fool's thoughts. So do your homework, and review The Motley Fool'sdisclosure policy.


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