Useful IRA charitable rollover, made permanent, helps donors plan

The news that the IRA charitable rollover has been made permanent comes as a relief for the charitably inclined. Enacted in 2006, Congress has had to extend it annually. And every year they wait until the last minute to renew it, so it has always been somewhat of a gamble whether or not to plan to take advantage of it. Now donors know it’s always there.

“The IRA charitable rollover is designed for someone who is motivated to make a gift to a charity,” says John Schuman, Chief Planning Officer at Budros, Ruhlin & Roe, Inc. “You don’t do this to make money, but if you’re committed to making donations then you can take the money out of your IRA and donate it directly to charity under this provision. The donor gets to give the full gift without incurring any negative tax consequences.”

Smart Business spoke with Schuman about the IRA charitable rollover and how it can be used to a donor’s benefit.

How might knowing the IRA charitable rollover is permanent affect a person’s giving strategy?

Of the various assets that could be used for charitable purposes, the best asset to use as a means of donating to charity is an IRA. While it is exposed to the highest tax bracket and its mandatory deductions are taxed as ordinary income, all of that can be avoided when it’s used to make donations directly to a qualifying charity.

When an individual decides to take a distribution from his or her IRA and donate it to charity, the money withdrawn will be taxed at 39.6 percent. Without the charitable rollover, donating from an IRA meant it would first be counted as income and subject to tax before the remainder could be gifted.

For instance, let’s say a person takes $100,000 out of his or her IRA, which would be counted as income. There is the opportunity to take a $100,000 federal tax deduction for giving it to charity, but adding that amount to a person’s taxable income could mean other itemized federal deductions, such as those designed to offset health care costs, get phased out, so he or she wouldn’t get a dollar-for-dollar deduction. Ohio-based income doesn’t allow itemized deductions, so that $100,000 donation from an IRA to charity also meant that the donor would move into a higher tax bracket in the state as well.

Those at or above age 70 1/2 are required to take minimum distributions from their IRAs. Fortunately for them, a donation counts as a minimum distribution. And by giving it to charity it’s not taxed. Using this method of charitable donation also means that the donor will stay below the phase-out thresholds and likely not move into a higher tax bracket since the distribution never gets counted as ordinary income.

What charities qualify to receive donations through this method? Which don’t?

Any charity is eligible to receive donations from an IRA, including community foundations. One restriction, however, is that money can’t be given to a donor-advised fund as it allows the donor to continue to control that gift.

There’s a lot of flexibility regarding the way distributions can be disbursed. It’s interesting to note that a donor doesn’t have to give all of the distribution to one charity, but can split it among as many as he or she likes.

Giving through an IRA has become a useful mechanism for charitably inclined individuals. For charities, it’s a preferred method of receiving donations and an easy way to solicit gifts from donors. It’s a great tool to make it easy for people to give larger gifts to charity. And, thanks to recent legislation, it’s a method that’s with us forever, which makes planning much easier than it had been.

Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.