Provision Permits Tax-free Charitable Transfers from IRAs

As part of the Emergency Economic Stabilization Act of 2008, the U.S. House of Representatives on Friday passed a two-year extension of Charitable IRA legislation, making it easier for Americans to give to causes they care about. The Charitable IRA provision, first enacted for 2006 and 2007, has the power to help local charities weather the current economic crisis. The extension goes through 2009.

In these financially turbulent times, millions of Americans continue to save pre-tax dollars in individual retirement accounts (IRAs). Thanks to regular investments and long-term returns, an estimated $4.7 trillion is invested in IRAs. The new law allows taxpayers 70½ and older to share the wealth by giving retirement savings directly to charity—and bypassing income tax.

This new law is a boon to local charities that are experiencing the effects of a tough economy. The tax benefit expires December 31, 2009. “It is a win-win—for people who would rather give to charity than pay taxes and the nonprofit organizations they choose to support,” said Marilyn Zack, Vice President of Development for Grand Rapids Community Foundation.

Thanks to decades of deliberate saving, some of today’s retirees have more money in their IRAs than they need for daily living expenses and long-term care. Charitable individuals and couples have expressed an interest in giving the funds to charity, but income tax must be paid on all withdrawals, which reduces the value of the gift. Others are concerned about designating their children as IRA beneficiaries, since that may draw unintended tax consequences.

“For larger estates, a good portion of IRA wealth goes to estate taxes and income taxes of beneficiaries,” Zack said. “Experts estimate heirs may receive less than 50% of IRA assets that pass through estates.”

A provision in the new federal law extends an option: transferring IRA assets directly to charity. By going directly to a qualified public charity such as the Grand Rapids Community Foundation, the money is not included in the IRA owner’s income and—most important—is not taxed, preserving the full amount for charitable purposes.

During 2008 and 2009 only, holders of traditional IRAs who are at least 70½ years old can make direct charitable transfers up to $100,000 per year. A single person can transfer $200,000 free from federal tax; a married couple can transfer up to $400,000 free from federal tax from separate accounts. Grand Rapids Community Foundation can help donors execute the transfers and choose from several charitable fund options for their gift. Donor Advised Funds do not qualify for tax-free IRA transfers.

“This really is a limited-time offer: the window is open now, but it will close at the end of 2009,” said Zack. “For anyone interested in establishing a permanent legacy in this community, this is the opportunity of a lifetime to make the gift of a lifetime.”