Fact & Commentary: Charitable IRA Rollover Extended, Part I

Deductions, Taxes and Tax Day

The Facts:

Your 2010 end-of-year giving season can include January 2011.

The Tax Relief Act signed by President Obama last Friday includes the long-awaited IRA charitable rollover. It allows donors over seventy-and-a-half to make a gift directly to your charity from their traditional or Roth IRA. January gifts can be claimed this year.

Please recognize that my analysis is based on my reading of the Joint Committee on Taxation Technical Explanation, without the benefit of IRS rulings, tax court decisions or other official guidance that has yet to come. I am not providing tax, accounting or legal advice. Donors must consult their own advisors to determine whether, and how, to make a charitable gift.

Old Law-Giving from IRAs. A charitable gift that originated from your donors’ Individual Retirement Accounts had to be treated as any other IRA distribution. Your donors reported the distribution as income, presumably in the same year they would claim their charitable deduction for gifts to your charity. Thus, your donors had to pay additional income tax and the distribution benefiting your nonprofit could have put them in a higher marginal tax bracket. Many of us know from personal experience that the tax payment on the additional income deterred most donors from giving from often over-funded IRAs.

That was the state of the law before August 2006, when the Pension Protection Act created the “qualified charitable distribution.” PPA, via extensions, continued through 2009. All this year, we’ve been under pre-PPA law, waiting impatiently for new law. Enter the Tax Relief Act of 2010, to revive direct IRA giving.

New Law-Giving from IRAs. The Act permits charitable gifts that originate from an IRA, without your donors having to report their IRA distributions as income. (These really are “distributions,” not rollovers. I’m using the vernacular for its recognition, but it’s not technically correct.) Here are the requirements for a qualified charitable distribution under the just-signed Act:

    1. 1. Your donor is at least 70 1/2 years old on the date of gift
      2. The IRA is a traditional or Roth
      3. Maximum $100,000 per donor per tax year, aggregated across all qualified distributions
      4. The IRA custodian makes a distribution directly to your charity
      5. The full value of the gift would be eligible for an income tax charitable deduction if it were not a qualified charitable distribution
      6. The dollars transferred would be includible in gross income if they were not within a qualified charitable distribution

Important Notes. Recognizing that 2010 has all but departed, the Act allows gifts in January 2011 to be reported by donors as if made on December 31, 2010. Your end-of-year giving from those 71 and over (let’s talk about age like people, not tax code) gets a one-month extension, if you have the consent of your gift processing office, CFO, auditors and gift crediting policy.

Your donors will find this significant. Amounts rolled over count against their annual required minimum distribution, and many elders are required to distribute to themselves (withdraw) more than they need. This isn’t as prevalent as it was in 2006 and 2007, because IRA balances used to calculate the minimum distributions are smaller than they were then, but overfunded IRAs still exist. After age 70 (OK, at 70 1/2) there’s a penalty for not withdrawing at least the required minimum, but your donors can work-off some of their required minimum distribution for 2010–in 2011– without increasing their 2010 gross income. Then they can do the same for 2011, in January, or anytime during the year. Only January qualified charitable distributions can count for 2010 or 2011, at your donors’ discretion.

(Interesting question: what if your donor is 70 1/2 when they make their January distribution, but wasn’t 70 1/2 on December 31? We’ll have to wait for guidance, or maybe we can presume IRS’s posture based on similar situations elsewhere. I’d say date of gift (12/31/10) controls, but that’s merely an early, and conservative, answer. Have an insight?)

January 2011 distributions that are claimed in 2010 also won’t impinge next year’s limit of $100,000. They’ll count toward this year’s maximum.

Fast-acting donors might prefer to rollover before December 31. I’m not fully confident that IRA custodians can accommodate that.

All charitable rollovers must be completed before January 1, 2012.

While traditional and Roth IRAs are eligible (and SIMPLE and SEP IRAs are not), the most likely gifts will come from traditional accounts. That’s because of number 6 above. Traditional IRAs are much more likely to be funded with dollars that would be included in gross income if not for the rollover, because those accounts are where contributions that are deducted from income (deductible) are made while working. Although Roth accounts cannot accept deductible contributions, there are true rollover scenarios where deductible dollars end up there. So, while it’s possible for Roth IRAs to hold dollars otherwise taxable on withdrawal, it’s not likely.

You may find it helpful to remember this generalization:

  • Traditional: Deductible from income on the way in, taxable on the way out.
  • Roth: Not deductible from income on the way in, not taxable on the way out.

The $100,000 annual maximum is per donor (IRA owner), not per retirement account.

Regarding number 4, while we were under the Pension Protection Act, the IRS explained in Notice 2007-7 that where a check payable to a nonprofit is delivered to the IRA owner by the account custodian, and the IRA owner delivers the check to the charity, the Service will consider that a direct distribution. I see no reason why that would not still apply.

Note also that distributions to supporting organizations and donor advised funds are not eligible.

Lastly, number 5 is significant. Qualified distributions are not charitable deductions from income. Instead, the tax advantage to donors is exclusion from gross income. Yet the gift amount must be such that it would be 100% deductible if it were not a charitable rollover, ignoring the 50% and 30% deduction limitations, and any income limitation that may apply.

That means your donors can’t use the charitable rollover to buy a table at your gala; or tickets to your sporting events; or pay for auction items. None of these gifts is 100% deductible. The deduction for each is reduced by the value received in exchange for the gift.

This requirement also disallows charitable gift annuities, remainder trusts and lead trusts. Neither earns donors a full face value charitable income tax deduction. (Their deductions are based on the present value of: what’s estimated to remain; estimated charitable remainder; and anticipated stream of charitable lead payments, respectively.)

The Commentary:

That’s Part II, tomorrow, when I’ll explain who’s a good prospect for an IRA rollover gift; give suggestions for promoting this to prospects (don’t forget your board–and Facebook); integrating this planned gift with your other fundraising channels; and why it’s not a tax “wash” when comparing this with an IRA withdrawal, then paying additional income tax, making a gift and claiming a charitable deduction. This might come up in your conversations with prospects and I can prepare you to answer that question (objection?) as you encourage rollover gifts in the coming months.

Check back tomorrow.

20 thoughts on “Fact & Commentary: Charitable IRA Rollover Extended, Part I

  1. The $1000 is the hypothetical nonprofit’s gift requirement. IRS isn’t interested in that. The $750 would meet the full deductibility requirement and would be a qualified charitable distribution, subject to all the other requirements that I lay out in the article.

  2. Let me ask you to clarify a little more. If the required donation is say $1000, but only $750 is deductible can the $750 be sent from the IRA and then a separate check written for the non deductible $250.

  3. I agree, Nanette, it’s frustrating. 2010 is only of charitable use to those who waited until the day the Relief Act was signed, December 17, to take their required minimum. Do you–and others–know how many people exceed their RMD? Everyone I’ve worked with (donors to our clients) treats the minimum as the maximum. What’s your experience? Any national stats?

    Many thanks for your comment.

  4. …and I also commiserate with Stanley. I don’t have RMD’s…not yet old enough. But my clients certainly did… and, like Stanley and his wife, most did not wait until the 11th hour (or 12th) to take them out. A professor years ago mentioned that tax policy should and does reflect social policy. I believed him. But I have my doubts when tax laws are enacted so severely late in the year. It’s hard to drive action in the midst of inaction.

  5. The ability to transfer money back to an IRA within 60 days is a rollover provision. Required minimum distributions (RMD’s) are NOT eligible for rollover. The new bill, in my first glance, anyway, is silent on this. So, my opinion would be that you cannot put back a distribution taken within the last 60 days – UNLESS it was more than your RMD! Also, please keep in mind that you can always withdraw MORE than your RMD. So even if you’ve taken your RMD for 2010, if you have extra funds in IRAs that you want to transfer to a charity, you can still take advantage of these provisions. Keep in mind that, in order for the January 2011 to be treated as for 2010, there is a proactive election to be made! You should, of course, contact your own tax advisor and/or your financial and estate planners!

  6. I am deeply disapointed that our learned, trusted, highly intellegent, leaders acted so promtly on these issues. My clients took care or their RMDs primarily in November to avoid the end of year rush. Washington just can’t seem to walk and chew gum at the same time! We planned to use my wife’s RMD to go straight to charities. Since it looked like gridlook was going to continue forever we took the distribution, paid state income taxes and sent on the net. Great job congress, all of you!

  7. If I were a Fidelity client, I’d be disconcerted that they couldn’t answer my question, Michael. I’ll ask a few friends in financial services if they can help us out. Informed answers are welcome.

  8. Dear Tony,

    You answered Warren Ransom’s question (which is the same as mine) with a need for more
    expertise. I have queried my trustees at Fidelity and they gave me the same reply. Where
    can I find this answer?

  9. That isn’t in the Joint Committee on Taxation Technical Explanation. I don’t know if it’s in the Act. Can anyone else help?

  10. Question – did the law enact the provision requested by Conrad Teitel – specifically that any rmd’s already distributed could still be gifted towards the ira charitable rollover? I’m not seeing anything on that provision.

  11. The problem for 2010 is most MRD’s already have been taken. But what if a taxpayer completed an MRD within the last 60 days? Can it be returned to the Trustee/Custodian and then a charitable rollover be initiated before January 31, 2011? I realize there may be an issue with tax withholding, but if the mechanics can be worked out, might this not be of relief to some taxpayers?

  12. Interesting observation: An individual taxpayer and spouse, if qualified, could rollover, for 2010, up to $100,000 each by January 31, 2011 and, for 2011, rollover up to $100,000 each between January 1, 2011 and December 31, 2011, for a total rollover amount up to $400,000 in 2011.

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