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Charitable Rollovers: There's Still Time

The 2010 Tax Relief Act extends a unique tax break for retirees with good intentions, letting you choose to have up to $100,000 transferred directly from an IRA to a qualified charity without paying any tax on the distribution. But the question remains: Should you do it? This technique, which has been dubbed a charitable rollover, remains a viable alternative for some, but you may have better options at your disposal.


Normally, if you donate cash to charity, you can deduct the full amount of your donation, within generous tax law limits. However, distributions from an IRA consisting of deductible contributions and earnings are taxed at ordinary income rates, currently as high as 35%. So if you withdraw $10,000 from an IRA and donate the full amount to charity, you may be able to deduct the full $10,000, but you're also taxed on the $10,000 distribution. It’s a wash for tax purposes.

Under this special provision, you can arrange to have funds in your IRA transferred directly to charity. You can’t deduct the gift as a charitable donation, but you’re not taxed on the distribution, either. Charitable rollovers are limited to those who’ve reached age 70½—and who thus must begin taking mandatory distributions from traditional IRAs—and the transfer can’t exceed $100,000 annually. The rule allowing such rollovers had expired after 2009, but it now has been retroactively reinstated to January 1, 2010 and extended through December 31, 2011. There’s still time for you to take advantage of the technique.

But is there really any difference between making this special transfer and taking a taxable distribution while getting credit for a deductible contribution? Either way, the money coming out of your IRA counts as part or all of your required minimum distribution from the account. But in some cases, a charitable rollover may provide an edge.
  • ·        Deductions for charitable donations are sometimes curtailed by limits based on your adjusted gross income (AGI). For instance, your annual charitable deduction can’t exceed 50% of your AGI, but a charitable rollover from an IRA is exempt from those limits. That could be important if you expect to report a low income in 2011.
  • ·        Because the charitable distribution is never realized as taxable income, your AGI will be lower, and that could help you clear tax law “floors” for medical expenses (7.5% of AGI); miscellaneous expenses (2% of AGI); or casualty losses (10% of AGI).
  • ·        If you’re carrying over charitable deductions from the previous year, because those deductions exceeded the limit for that tax year, you can receive the full benefit of the deductions this year. Otherwise, the regular charitable limits are applied before the carryover is allowed.
  • ·        An IRA withdrawal will often result in taxable income that could increase the tax on Social Security retirement benefits. Using the charitable rollover technique avoids this problem.

The charitable rollover technique isn’t limited to traditional IRAs. You can also transfer funds to charity from a Roth IRA, although because Roths don’t have mandatory distributions and withdrawals are generally tax free, it would usually be better to take money from a Roth IRA and then use the cash to make a deductible contribution.

To do a charitable rollover, the money coming from the IRA must otherwise qualify as a charitable donation. For example, if the deductible amount is reduced because you received a benefit or if the gift isn’t properly substantiated, this won’t work. Also, contributions have to be made directly by the trustee of your IRA to the designated charitable organization.

Because the 2010 Tax Relief Act wasn’t signed until December 17, 2010, Congress granted retirees a little leeway to take advantage of the extension for the 2010 tax year, allowing transfers that were completed by January 31, 2011 to qualify. Later charitable rollovers can still be used to reduce taxes for 2011.

But is making a charitable contribution from your IRA the best option? Alternatives, such as donating appreciated securities—and thus avoiding capital gains taxes—might be more cost-effective as a way to support philanthropic organizations. Here, as always, it makes sense to view your charitable contributions in the context of your overall financial situation. We can help you weigh all of the factors that could affect your decision.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.



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