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IRA DISTRIBUTIONS FOR CHARITABLE DONATIONS

The Pension Protection Act of 2006 allowed certain IRA holders the opportunity to donate assets in their IRA to qualified charitable organizations.  If it’s done correctly, the distributions are tax-free.  The provision applies for Traditional and Roth IRAs and does not typically apply to distributions from active SEP or SIMPLE IRAs unless an employer contribution was not made to the SEP or SIMPLE IRA during or for the year the charitable distributions are made.  

Originally, this benefit was available only through December 31, 2007.  On October 3, 2008, President Bush signed into law The Emergency Economic Stabilization Act of 2008, which contains a provision that extends the charitable donation benefit through December 31, 2009.

Eligibility and donation limit

IRA holders must be at least 70˝ years of age on or before the actual day of making the donation.

For those who do qualify by age, their maximum IRA charitable donation is limited to $100,000 per tax year.  Any distributions in excess of this limit will not qualify for the tax exclusion benefit and will be treated as ordinary income.  Note that distributions of base contributions and tax-paid conversions to Roth IRA holders are generally not considered taxable income.

Direct payment requirement  

The IRA holder must instruct the IRA trustee/custodian to issue the distribution check payable to the charity (including the charity’s address).  The check can be mailed either to the IRA holder or directly to the charity.  If the check is mailed to the IRA holder, he or she is ultimately responsible for delivery of the check to the charity.  The IRA holder is also responsible for receiving a receipt from the charity for proof of a direct donation.

If an individual elects to receive an IRA distribution directly (payable to the individual) with the intention of making a future charitable donation, the IRA holder must report the distribution as ordinary income received.  To offset, the IRA holder would deduct the charitable contribution on their income tax return through itemized deductions, if eligible. (Contact a professional tax advisor for eligibility information.)

Charitable donation satisfies Traditional IRA Required Minimum Distributions (RMDs)

Amounts of up to $100,000 sent directly to a qualified charity on behalf of an eligible Traditional IRA holder will count toward satisfying that individual’s Required Minimum Distribution (RMD) for the year.  Note, however, that if an individual turns 70˝ in 2008 and elects to delay their first RMD until April 1, 2009, that distribution will be reported in 2009.  In order to utilize the benefit for 2008, the donation must be distributed from the IRA by December 31, 2008.

Benefit of excluding income

By not including a charitable donation from an IRA as ordinary income, an individual’s adjusted gross income is not increased, which could affect the ability to qualify for Roth contributions or conversions. 

Qualified charities

For information pertaining to qualified charities, go to the IRS web site, www.irs.gov/individuals, and review the “Charities and Non-Profits” section.

Please note that this information is for educational purposes only and it is always recommended that you seek the aid of a competent tax advisor or tax attorney to assist you with tax advice and guidance.

To better understand your options when taking a distribution for the purpose of making a charitable donation please take a minute to order a Rollover Kit.

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