by Denise Appleby CISP, CRC, CRPS, CRSP, APA
The timing of a donation of IRA assets to charity will determine its tax impact. As such, individuals must implement a strategic plan to ensure that taxes are minimized or eliminated. In some cases, it may make sense to designate the charity as the beneficiary of the IRA, instead of donating the assets during the individual’s lifetime. In other cases, the individual may be able to donate eligible amounts during his/her lifetime and treat the amount as a tax-free donation.
Gifting Before Death
Before Age 70 ½
IRA assets that are donated to a charity before the owner reaches age 70 ½ will be treated as regular distributions. This means that the amount would be treated as ordinary income to the owner and any tax-deferred amount would be subject to income tax. If the individual is eligible, the amount can be claimed as an itemized deduction on his/her tax return.
Age 70 ½ and After
Individuals may donate up to $100,000 – of their IRA balances to qualified charities as tax-free donations each year, providing the distributions meet the following requirements:
- They occur on or after the individual reaches age 70 ½,
- The amount is distributed from a Roth IRA or Traditional IRA, including inherited IRAs. The amount can also be distributed from a SEP IRA or SIMPLE IRA, providing the SEP IRA or SIMPLE IRA is not ongoing. For this purpose, a SEP IRA or SIMPLE IRA is treated as ongoing if an employer contribution is made to the plan ,for the plan year ending with or within the IRA owner’s taxable year in which the charitable donation would be made,
- The transaction is processed as a direct transfer to the charity. For this purpose, if the distribution amount is made payable to an eligible charitable organizationdescribed, and delivered by the IRA owner to the charitable organization, the payment will be considered a direct payment by the IRA trustee to the charitable organization,
- The donation would otherwise qualify for a charitable contribution deduction under § 170 (without regard to the percentage limitations of § 170(b)), and
- The donation must be made to eligible charities. This does not include supporting organizations described in § 509(a)(3) or donor advised funds that are described in § 4966(d)(2).
If the individual did not already take his/her required minimum distribution (RMD) from the account for the year, the donation can be used towards satisfying the RMD for that year.
Note: PPA made QCDs available for 2006 and 2007. The Tax Extenders and Alternative Minimum Tax Relief Act of 2008/ Emergency Economic Stabilization Act of 2008-H.R. 1424-QCD) extended it through December 31, 2009. It was further extended under The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010through December 31, 2011, which also provided that QCDs for 2010 could be distributed as late as before February 1, 2011.See Donating Retirement Assets to Charities for more on this topic.
Gifting After Death
Individuals can make provisions to gift IRA assets to a charity after death, by designating the charity as the beneficiary of the retirement account. This is usually a more favorable option for non-Roth IRA assets than making provisions for the charity to receive other assets that have already been taxed, so as to leave the assets that are already taxed to other beneficiaries. For more on beneficiary designations, see Get Beneficiary Designations in Order
If the tax effect is not an issue, then individuals can donate their IRA assets to charity at anytime. However, if the tax effect is an issue, then the timing and the type of retirement account from which the funds are withdrawn are of importance, and steps must be taken to avoid or minimize any applicable taxes. For individuals who want to take advantage of the provision to make tax-free distributions to qualified charities, steps must be taken to ensure the distributions satisfy the requirements.