Seniors 70½ and older must take annual required minimum distributions from their IRA, at which point the distribution is taxed. However, if you do not need the income, your money can bypass the IRS by directing your distribution to a charitable organization. The distribution is not taxable, and the contribution is not tax-deductible—an important benefit for people who do not itemize or otherwise would not be able to fully utilize the deduction. The contribution also satisfies the annual minimum distribution requirement.
Provisions in the federal Pension Protection Act of 2006 allowed individual donors who are at least age 70½ in 2009 to make a qualified charitable distribution tax-free from their Traditional or Roth IRA account(s).
This tax break had been very popular among IRA holders and their favorite charities, but it expired at the end of 2009. With the 2010 Tax Relief Act, it was revived for 2010 and 2011. Because of the last-minute passage of the act, seniors will be allowed to treat any charitable IRA donations they make through the end of January 2011 as if they made it in 2010. This will give you and your charities time to make the transfer. Also if you happened to have missed your required minimum distribution for 2010, the January grace period allows you to avoid penalties as long as you direct the money to charity.
Moreover, your charitable donations are not limited to the required minimum distribution; the new law permits you to give up to $100,000 to charity in 2010, and another $100,000 in 2011.
There are several important points to keep in mind:
- Charitable contributions from an IRA must go directly to a public charity that is not a supporting organization. You cannot take a distribution into your bank account first and then write the charity a check.
- Contributions to donor-advised funds and private foundations generally do not qualify for tax-free IRA rollover contributions.
- Distributions can only be made from traditional Individual Retirement Accounts or Roth IRAs.
- Donors cannot receive any goods or services in return for charitable IRA rollover contributions in order to qualify for tax-free treatment.
- In order to benefit from the tax-free treatment, donors must obtain written substantiation of each IRA rollover contribution from each recipient charity.
While this provision does not apply to everyone, if you are fortunate enough not to need distributions from your IRA to pay for your living expenses, and you cringe at having to pay taxes on your required minimum distributions, then this provision may be worth exploring. If you would like to talk to a Tax Consultant about making a qualified charitable distribution, please contact Henssler Financial Tax & Accounting Division at 770-429-9166.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
