Thursday March 28, 2024

4.6.8 IRA Charitable Rollovers

IRA Charitable Rollovers

Permitted IRA Rollover Gifts:  IRA rollover gifts may be made to Sec. 509(a)(1) and Sec. 170(b)(1)(A) public charities.

IRA Rollovers to Pay Pledges:  Many tax advisors were concerned that IRA rollovers to pay pledges would be restricted in the same manner that payment of pledges from donor advised funds are restricted.

IRA Rollover Gifts Not Permitted:  There are a number of restrictions on the "qualified charitable distribution" (QCD).

IRA Rollover Enhancements Under Secure 2.0 Act:  Individuals age 70½ or older are permitted to make distributions from their IRA directly to charity and avoid recognition of income.

IRA Rollover Qualifies for RMD:   Once reaching the required beginning age, IRA owners must take a required minimum distribution (RMD).

IRA Charitable Rollover Potentially Reduced:  If an individual makes contributions to a traditional IRA after age 70½, the qualified charitable distribution (QCD) limit is reduced by the amount of the deductible IRA contributions after that age.

IRA Custodians and Qualified Charitable Distributions (QCDs):  IRA custodians generally have IRA distribution forms that may be obtained by mail or downloaded from their websites.

IRA Donor Actions:  IRA owners typically contact their IRA custodian during the 4th quarter of each year and specify the amount of their IRA distribution.

Treasury IRA Rollover Guidelines:  In Notice 2007-7, Treasury released guidelines on IRA rollover provisions of the Pension Protection Act of 2006.

IRA Rollover Reporting:  Under Treasury instructions for IRS Form 1040, the IRA custodian will send a Form 1099 to the donor and report the full qualified charitable distribution amount.

State Tax Impact:  There are at least three different categories of states with respect to the charitable IRA rollover.

Rollovers from Other Qualified Plans to IRAs:  IRA rollovers are generally permitted for most IRAs.

IRA Charitable Rollover – Donor Profiles:  There are five donor profiles for IRA rollover gifts.

IRA Gift Opportunities:  The IRA charitable gifts provision opens up many gift opportunities.

Permanent Charitable Tax Extenders

In December of 2015, both the Senate and House passed the Protecting Americans From Tax Hikes Act of 2015 (H.R. 2029). The bill makes permanent four charitable tax extenders.

The four permanent charitable provisions include the following:

1. Conservation Gift Limits – Gifts of property for conservation purposes benefit from increased deduction limits. The normal 30% limit for appreciated property gifts is increased to 50% and the carry-forward limit is extended from five years to 15 years.

2. Food Inventory Gifts – An enhanced deduction for contributions of "apparently wholesome" food will be available for all donors. The deduction is the lesser of twice the basis or basis plus one-half of the appreciation.

3. IRA Charitable Rollover – Each IRA owner may make a transfer of up to $105,000, indexed for inflation per year to a qualified charity. The IRA charitable rollovers are tax-free and not included in adjusted gross income.

4. S Corporation Appreciated Gifts – A Subchapter S corporation may give appreciated stock or land to charity. Only the basis of the S corporation in the donated asset will be used to reduce the shareholder basis, even though the full fair market value deduction is claimed by the shareholder.


Permitted IRA Rollover Gifts


IRA rollover gifts may be made to Sec. 509(a)(1) and Sec. 170(b)(1)(A) public charities. This also includes Sec. 170(b)(1)(A) conduit foundations. In most cases, IRA rollover gifts will be a transfer from a regular IRA to a public charity for the general purposes of that charity. However, it is permissible to make a transfer to a field of interest fund or for a qualified charitable purpose. For example, a transfer from an IRA owner age 71 to a college or university for a particular scholarship fund is permitted. Similarly, a transfer to a relief organization for a specific disaster relief fund is also acceptable.

IRA Rollovers to Pay Pledges


Many tax advisors were concerned that IRA rollovers to pay pledges would be restricted in the same manner that payment of pledges from donor advised funds are restricted. However, since the IRA funds are owned by the IRA owner, they may be used to fulfill a legally-binding pledge. The transfer from the IRA owner to the charity is treated as a receipt by the owner under Sec. 4975(d)(9) and therefore the IRA rollover is not a prohibited transaction. See Notice 2007-7.

IRA Rollover Gifts Not Permitted


There are a number of restrictions on the "qualified charitable distribution" (QCD). The QCD may not be made to a Sec. 509(a)(3) supporting organization (SO) or to a donor advised fund (DAF) described in Sec. 4966(d)(2). Since the rollover is limited to organizations in Sec. 170(b)(1)(A), private foundations are also excluded, with the exception of the conduit private foundation.

Finally, the "entire distribution" transferred to the charity must qualify for a Sec. 170 charitable deduction. Sec. 408(d)(8)(C). Therefore, a "quid pro quo" transfer is not permitted. The IRA charitable deduction may not be used to purchase a banquet table for a donor, family and friends at the annual charitable auction. Similarly, the gift may not be used to qualify for preferential seating at athletic events or other types of "quid pro quo" gifts.

IRA Rollover Enhancements Under Secure 2.0 Act


Individuals age 70½ or older are permitted to make distributions from their IRA directly to charity and avoid recognition of income. Section 307 of the Secure 2.0 Act allows a one-time rollover of $50,000 from an IRA to a life income plan. This provision amends Internal Revenue Code Section 408(d)(8) and creates a limited one-time IRA rollover into qualified life income plans. The qualified charitable distribution (QCD) of up to $50,000 is permitted on or after January 1, 2023. In 2024, the election can be made up to $53,000.

The QCD election distribution may be to a charitable remainder annuity trust, a standard payout charitable remainder unitrust or an immediate charitable gift annuity. A net income plus makeup unitrust or a deferred payment gift annuity are not qualified charitable entities.

The distribution must be to a charitable remainder trust with the remainder interest distributed to an exempt nonprofit. For a charitable gift annuity, it must have a 5% or higher payout rate and be qualified under Section 501(m)(5)(B).

The lifetime income must either benefit the IRA owner, the IRA owner's spouse or the IRA owner and spouse. All payments from a charitable remainder trust will be ordinary income. Because there is no investment in the contract under Section 72(c), all payouts from a gift annuity will also be ordinary income.

The bill permits an inflation adjustment starting in 2024. In 2024, the limit is $105,000 for outright IRA rollover gifts and $53,000 for the one-time limit for gifts to a life income plan. The new numbers will be rounded to the nearest thousand dollars.

If the IRA custodian does not have a specific form, the IRA owner may send a letter to the IRA custodian similar to the following:

SAMPLE - IRA CUSTODIAN INSTRUCTION LETTER - IRA TO LIFE INCOME GIFT

(Sent from Donor to Custodian Requesting IRA Rollover to Life Income Gift)

[DATE]


Subject: Request to Initiate IRA Charitable Qualified Distribution to Fund a Life Income Gift

Dear IRA Custodian,

Federal law permits the account holder of an IRA who is 70 1/2 or older to make a Qualified Charitable Distribution ("QCD") directly from their IRA to create a life income gift plan with a qualified public charity. It is my intention that the gift be treated as a QCD to fund a [charitable remainder unitrust/charitable remainder annuity trust or charitable gift annuity].

As the owner of IRA Account #____________that is in the custody of your organization, I request that you make the following QCD to the following organization to fund a [charitable remainder unitrust/charitable remainder annuity trust or charitable gift annuity]:

$_______ to [Name of Charity] with an address of [Address of Charity] with the following Tax ID Number: [Insert Charity's Tax ID Number]

I understand that this is a one-time QCD election, with a maximum amount of $53,000 permitted to be transferred for the purpose of funding a life income gift plan.

This letter is sufficient authorization for you to make the QCD gift(s) listed above. However, if you require any further documents, please forward those to me for my signature.

Cordially yours,

IRA Owner

SAMPLE - CHARITY IRA ROLLOVER ACKNOWLEDGMENT LETTER - IRA TO LIFE INCOME GIFT

(Sent from Charity to Donor After Gift Is Received)

[DATE]


[Name of Donor(s)]
[Charity Street Address]
[City, State, Zip Code]

     Subject: IRA Rollover Gift for [Insert Year]

Dear [Name of IRA Rollover Gift Donors]:

Thank you for your IRA Charitable Rollover gift. An IRA rollover gift may comply with the "Qualified Charitable Distribution (QCD)" requirements of Section 408(d)(8) of the Internal Revenue Code to use your one-time election to fund a Life Income Gift under Secure 2.0.

Your QCD gift, in the amount of $________________, was transferred directly from your IRA custodian [Name of Custodian] located in [City, State of Custodian].

Please accept this letter as a contemporaneous written acknowledgement of the following: (1) no goods or services were provided in exchange for your QCD, except for [insert the type of charitable split interest gift, the funding value and the approximate value of the donor's benefit (i.e. present value of the income interest or contract value)] ; (2) our organization is a qualified public charity and therefore we may receive your QCD; and (3) your QCD is a gift to us for general purposes or to a designated fund, and not to a donor advised fund or a supporting organization.

Thank you again for this generous gift through an IRA charitable rollover.

Please feel free to contact me if you have any questions.

Cordially yours,

[Signature of Gift Planner]
[Title of Gift Planner]
[Name of Charity]
[Address of Charity]
[Charity City, State, Zip]

IRA Rollover Qualifies for RMD


Once reaching the required beginning age, IRA owners must take a required minimum distribution (RMD). Starting in 2023, the age for required minimum distributions (RMDs) will increase from 72 to 73. If an IRA owner turns 72 in 2023 or later, the IRA owner will start taking RMDs at age 73. Beginning in 2033, the age for RMDs will increase to age 75 for those individuals who turn 74 in 2033 or later. Individuals who were taking RMDs in 2022 will continue to take a distribution each year based on their age. The RMD in nearly all cases is calculated using the Uniform Table. Under the Uniform Table, distributions are calculated based on life expectancy and increase each year based on the age of the IRA owner.

The required distribution is calculated by determining the expectancy under the Uniform Table, the IRA fair market value on December 31 of the previous year and multiplying a fraction of one divided by the applicable expectancy times this fair market value. The RMD must be taken by December 31 each year.

The vast majority of IRA owners with larger balances take the RMD during the months of October, November and December. Because many individuals with larger IRAs do not require IRA funds immediately for living expenses, by delaying an RMD until the end of the year they benefit from additional tax-free growth in the IRA.

Fortunately, the IRA charitable rollover will qualify for the donor's RMD. The Congressional Joint Committee on Taxation Technical Explanation of PPA 2006 (JCX-38-06) states on page 266, "Qualified charitable distributions are taken into account for purposes of the minimum distribution rules applicable to traditional IRAs to the same extent the distribution would have been taken into account under such rules had the distribution not been directly distributed under the provision."

Since most IRA owners take the RMD during the 4th calendar quarter of each year, they are likely to contact advisors to discuss the benefits of receiving the full RMD or giving part or all of it to charity. By transferring part or all of their RMD to charity, they will have a lower taxable income. This could both simplify their tax return and reduce income taxes.

For purposes of both the RMD and the qualified charitable distribution, all donor's IRAs may be treated as one IRA. A donor may make the RMD or the qualified charitable distribution from any IRA.

IRA Charitable Rollover Potentially Reduced


If an individual makes contributions to a traditional IRA after age 70½, the qualified charitable distribution (QCD) limit is reduced by the amount of the deductible IRA contributions after that age. The IRA contribution amount is cumulative and specific calculations will eventually be published in IRS Regulations. QCD gifts in excess of post age 70½ traditional IRA cumulative contributions will be included in income and deductible if the individual itemizes deductions. It is probable that most donors either will not have earned income after age 70½, will have total income over the IRA phaseout limits (and may not fund an IRA) or may choose to make Roth IRA contributions.

Example 4.6.8A IRA Charitable Rollover Reduction

Matthew Jones is a faithful supporter of Favorite Charity. He loves life and enjoys his job. Matthew has earned income and would like to continue contributing to his IRA. He makes a deductible contribution of $5,000 at age 71 to his IRA. By the time Matthew is 73, he must start taking his required minimum distributions (RMDs). His IRS balance is approximately $500,000 IRA and his RMD is $20,000. Matthew decides that he would like to make a qualified charitable distribution (QCD) from his IRA to his favorite charity in the full amount of his RMD. Matthew directs his IRA custodian to make a qualified charitable distribution to Favorite Charity in the amount of $20,000. Under the SECURE Act, Matthew's QCD will be partially tax-free and partially a taxable distribution. Because Matthew contributed to his IRA post age 70½, his QCD at age 73 is reduced by the value of his deductible contribution to his IRA. Matthew's QCD amount will be $15,000, because that is the excess of his $5,000 deductible IRA contribution. The $15,000 value of the QCD will not be taxable to Matthew and will not generate a tax deduction. The $5,000 value of Matthew's deductible IRA contribution will be treated as taxable income and will create a charitable tax deduction. When IRA custodian sends Matthew a Form 1099 with a $20,000 IRA distribution, Matthew's tax preparer completed his Form 1040. The $20,000 IRA distribution was reported on Line 4a and the taxable portion of $5,000 was reported on Line 4b. (Note: the IRS may change the line numbers in future years on Form 1040, but the reporting method will be as indicated.)



IRA Custodians and Qualified Charitable Distributions (QCDs)


IRA custodians generally have IRA distribution forms that may be obtained by mail or downloaded from their websites. In order to obtain an IRA distribution, many owners will download the distribution form and select the type of IRA distribution. Since there are a number of options for individuals to take distributions at given ages and under various exceptions, the distribution forms typically already have three to six options that may be selected.

It is anticipated that IRA custodians will add the IRA charitable rollover to the other distribution categories. In this case, an IRA owner will select the IRA charitable rollover, designate the charity by legal name, city and state, and enter the amount of the rollover. The IRA custodian will then make the transfer. It is uncertain whether or not IRA custodians will determine that the designated charity is qualified under the applicable rules for the IRA rollover.

IRA custodians have asked Treasury whether or not they are required to exercise due diligence to determine that the charity qualifies for an IRA rollover. Supporting organizations, donor advised funds of public charities and donor-benefit gifts are not qualified for the IRA rollover. Notice 2007-7 indicates that the IRA custodian may rely upon "reasonable representations made by the IRA owner." As a result, the distribution is not subject to withholding and the IRA owner is at risk with respect to a potential nonqualified transfer.

IRA Donor Actions


IRA owners typically contact their IRA custodian during the 4th quarter of each year and specify the amount of their IRA distribution. Most IRA owners with larger IRAs specify an amount equal to the RMD based on their age, their IRA balance the previous December 31 and the Uniform Table rules. If an IRA owner over 70½ desires to make an IRA charitable rollover, it will be necessary to download the applicable form with the addition of the charitable IRA rollover or obtain an IRA charitable rollover form by mail from the IRA custodian.

If the IRA custodian does not have a specific form, the IRA owner may send a letter to the IRA custodian similar to the following:


SAMPLE - IRA CUSTODIAN INSTRUCTION LETTER

(Sent from Donor to Custodian Requesting IRA Rollover)

[DATE]


     Subject: Request to Initiate IRA Charitable Qualified Distribution

Dear IRA Custodian,

Federal law permits the account holder of an IRA who is 70 1/2 or older to make a Qualified Charitable Distribution ("QCD") directly from their IRA to a qualified public charity.

As the owner of IRA Account #____________that is in the custody of your organization, I request that you make the following QCD(s) to the following organization(s):

1. $_______ to [Name of Charity] with an address of [Address of Charity] with the following Tax ID Number: [Insert Charity's Tax ID Number]

2. $_______ to [Name of Charity] with an address of [Address of Charity] with the following Tax ID Number: [Insert Charity's Tax ID Number]

It is my intention that the above listed gift(s) be treated as a QCD and that the same be used to satisfy, in whole or in part, my Required Minimum Distribution (RMD) in the year of transfer, if applicable.

This letter is sufficient authorization for you to make the QCD gift(s) listed above. However, if you require any further documents, please forward those to me for my signature.

Cordially yours,

IRA Owner

After the IRA owner has the appropriate form as required by the IRA custodian, he or she will need to specify the amount of the charitable IRA rollover. Since the limit is for "a taxpayer," a married couple could each give up to $105,000 indexed for inflation from two separate IRA accounts. Even in community property states, the limit will apply to each account.

The IRA distribution form should, at a minimum, require the legal name, city and state of the charity. Since the charity must be a public charity and not a supporting organization, if the donor or his or her advisor are uncertain, contact should be made with the charity to make certain that it is a qualified public charity and not a supporting organization.

Most IRA custodians transfer IRA rollover funds by check or electronic transfer directly to the charity. However, some IRA custodians issue a check payable to the charity, but send the check to the donor for forwarding to the charity. This transaction will still qualify under Sec. 408(d)(8) as an IRA rollover if the check is issued by the IRA custodian, made payable to the charity and the owner delivers the check prior to December 31 of the applicable year. Delivery may be made by physical transfer to an agent for the charity or by placing the custodian issued check in the U. S. mail by December 31 of the appropriate year. Different rules apply if the donor has check writing privileges on the IRA account, as is becoming more popular. If the donor has an IRA checkbook and writes a check to charity, the funds must clear in the year of the check's issuance.

A charitable organization may also offer a specimen letter for donors to sign to notify the charity of an IRA rollover gift. This example letter may be modified by the charitable organization and provided to donors so they can inform the charity and receive their contemporaneous written acknowledgement.

SAMPLE - DONOR NOTICE TO CHARITY RE IRA ROLLOVER

(Sent from Donor Notifying Charity that Gift Will be Coming)

[DATE]


[Name of Charity]
[Office of Gift Planning]
Attn: [Name of Gift Officer]
[Charity Street Address]
[City, State, Zip Code]

     Subject: IRA Rollover Gift for [Insert Year]

Dear [Name of Gift Officer]:

I am pleased to inform you that I have directed the custodian of my Individual Retirement Account ("IRA") to make a qualified charitable distribution from my IRA to your organization. The information concerning my IRA and my gift are described below.

IRA Plan Trustee/Administrator Name: _________________________________________

Account Number: ____________________________________________

Distribution Amount: _______________________________________________

Comments: _______________________________________________________________

It is my intention that: (1) this gift from IRA comply with the "qualified charitable distribution" requirements of Section 408(d)(8) of the Internal Revenue Code; (2) that this gift will be used to satisfy all or part of my annual required minimum distribution; and (3) that I will not be able to claim a charitable income tax deduction for my IRA gift.

When you receive the distribution from the trustee/administrator of my IRA, please send me a contemporaneous written acknowledgement that includes the following: (1) information about the amount of my gift; (2) a statement confirming that no goods or services were transferred to me in consideration for this gift; and (3) that indicates that my gift will not be placed in a donor advised fund or supporting organization.

If you have any questions concerning my gift or this letter, please let me know.

Sincerely,

Donor's Signature: _____________________________ Date: ____________
Printed Name: _________________________________________________
Address: ______________________________________________________
City: _________________________ State: _________ Zip Code: _________
Phone: ________________________ Email: _________________________



SAMPLE - CHARITY IRA ROLLOVER ACKNOWLEDGMENT LETTER

(Sent from Charity to Donor After Gift Is Received)


[DATE]


[Name of Donor(s)]
[Charity Street Address]
[City, State, Zip Code]

     Subject: IRA Rollover Gift for [Insert Year]

Dear [Name of IRA Rollover Gift Donors]:

Thank you for your IRA Charitable Rollover gift. An IRA rollover gift may comply with the "Qualified Charitable Distribution (QCD)" requirements of Section 408(d)(8) of the Internal Revenue Code.

Your QCD gift, in the amount of $________________, was transferred directly from your IRA custodian [Name of Custodian] located in [City, State of Custodian].

Please accept this letter as a contemporaneous written acknowledgement of the following: (1) no goods or services were provided in exchange for your QCD; (2) our organization is a qualified public charity and therefore we may receive your QCD; and (3) your QCD is a gift to us for general purposes or to a designated fund, and not to a donor advised fund or a supporting organization.

Thank you again for this generous gift through an IRA charitable rollover.

Please feel free to contact me if you have any questions.

Cordially yours,

[Signature of Gift Planner]
[Title of Gift Planner]
[Name of Charity]
[Address of Charity]
[Charity City, State, Zip]



Treasury IRA Rollover Guidelines


In Notice 2007-7, Treasury released guidelines on IRA rollover provisions of the Pension Protection Act of 2006. Section IX of the Notice offers several clarifications on IRA rollovers from custodians to charities.

Under the IRA charitable rollover legislation, IRA owners age 70½ and older may transfer up to $105,000, indexed for inflation, from an IRA directly to a qualified public charity. The transfer is not included in taxable income and qualifies for the IRA owner's RMD.

Notice 2007-7 clarifies specific issues concerning the timing of the transfer, transfers by husbands and wives, qualifications of the charitable recipient, acknowledgements by charities and fulfillment of pledges with IRA gifts.

IRA Rollovers To Pay Pledges – Because the IRA funds are owned by the IRA owner, they may be used to fulfill a legally-binding pledge. The transfer from the IRA owner to the charity is treated as a receipt by the owner under Sec. 4975(d)(9) and therefore the IRA rollover is not a prohibited transaction.

IRA Owner Delivers Check – Most IRA custodians transfer IRA rollover funds by check or electronic transfer directly to the charity. However, some IRA custodians issue a check payable to the charity, but send the check to the donor for forwarding to the charity. This transaction will still qualify under Sec. 408(d)(8)(A) as an IRA rollover if the check is issued by the IRA custodian, made payable to the charity and the owner delivers the check prior to December 31 of the applicable year. Delivery may be made by physical transfer to an agent for the charity or by placing the check in the U. S. mail by December 31 of the appropriate year. Different rules apply if the donor has check writing privileges on the IRA account, as is becoming more popular. If the donor has an IRA checkbook and writes a check to charity, the funds must clear in the year of the check's issuance.

IRA Custodian May Rely on IRA Owner Representation – IRA custodians have inquired whether or not they are required to exercise due diligence to determine that the charity qualifies for an IRA rollover. Supporting organizations, donor advised funds of public charities and donor-benefit gifts are not qualified. The Notice indicates that the IRA custodian may rely upon "reasonable representations made by the IRA owner." As a result, the distribution is not subject to withholding and the IRA owner is at risk with respect to a potential nonqualified transfer.

IRA Rollover Not Qualified – If the transfer is not qualified because the IRA owner is less than age 70½, the transfer is to a supporting organization or a donor advised fund or there is a donor-benefit gift, then the distribution is taxable to the owner under Sec. 408. However, the owner will qualify for a charitable deduction under Sec. 170 if the transfer is to a qualified charitable organization. With the 60% of AGI limit for charitable gifts of cash to public charities, it is possible that the gift may not be fully deductible in the year of the transfer. In that case, the excess may be carried forward for up to five years.

Charitable Deduction and Reporting – The IRA rollover is not included in taxable income and consequently there is no income tax deduction. However, the donor must still comply with substantiation requirements under Sec. 170(f)(8). The recipient charity should issue an acknowledgment for the IRA rollover that is similar to a gift receipt. The acknowledgement should include the date of the gift, the name of the IRA custodian, the amount of the gift, that the gift is a qualified charitable distribution under Sec. 408(d)(8)(A), and state that no goods or services were provided in exchange for the gift. Finally, the acknowledgement should state that the charitable organization has received the gift for general purposes or a field of interest fund, that it qualifies as a Sec. 170(b)(1)(A) public charity, and the gift is not to a Sec. 509(a)(3) supporting organization or Sec. 4966(d)(2) DAF.

Ongoing SEP-IRA Rollover – IRA rollovers are permitted generally for most IRAs. There is an exception for the SEP-IRA or a SIMPLE IRA. If the employer has made a contribution to these accounts during the taxable year, a charitable IRA rollover is not permitted. However, if an employee has retired and the employer is no longer making contributions to the SEP-IRA, then it qualifies for the Sec. 408(d)(8)(A) IRA rollover.

Married Couple IRA Rollovers – The IRA rollover is limited per IRA owner each year. A married couple may each transfer up to the limit from his or her personal IRA account to a qualified charity. If a married couple has substantial IRA accounts, then $210,000 in 2024, indexed for inflation may qualify for IRA rollovers.

IRA Rollover Reporting


Under Treasury instructions for IRS Form 1040, the IRA custodian will send a Form 1099 to the donor and report the full qualified charitable distribution amount. The donor will report the total distribution on Line 4a of Form 1040, (the line numbers on Form 1040 may change in future years) but will report only the taxable distribution on Line 4b. If the qualified charitable distribution is the only IRA distribution because it fulfills the RMD, then the number on Line 4b will be zero.

Example 4.6.8B IRA Rollover


Mary Jones is a faithful supporter of Favorite Charity. She has a $200,000 IRA and her RMD is 5%, or $10,000. Because she has substantial other income, Mary directs her IRA custodian to make a qualified charitable distribution to Favorite Charity in the amount of $10,000. Mary informs Favorite Charity and receives a contemporaneous written acknowledgment of her IRA gift. There was no quid pro quo involved and the gift was not to a DAF or SO. When IRA custodian sent Mary a Form 1099 with a $10,000 IRA distribution, Mary's tax preparer completed her Form 1040. The $10,000 IRA distribution was reported on Line 4a and the taxable portion of zero was reported on Line 4b. Because the full RMD was transferred to Favorite Charity, Mary paid no tax on her IRA RMD. (Note: the IRS may change the line numbers in future years on Form 1040, but the reporting method will be as indicated.)

State Tax Impact


There are at least three different categories of states with respect to the charitable IRA rollover. First, some states do not presently provide for charitable income tax deductions. In Indiana, Ohio, Massachusetts, Connecticut, Illinois, Pennsylvania, and Wisconsin, there are no state charitable itemized deductions. Therefore, donors will effectively benefit from the IRA rollover by reducing their state taxable income and reducing their state taxes. Both these donors and federal non-itemizer donors will benefit directly by making charitable gifts from their IRAs.

Second, some states permit charitable deductions, but use the federal adjusted gross income as an initial reference number for determining state tax. In this circumstance, the reduced adjusted gross income as a result of the charitable IRA rollover will also reduce state taxes. For example, the California Franchise Tax Board excludes a 'qualified charitable distributions' from adjusted gross income for state income tax purposes.

Finally, there may be some states in which the state does not recognize the IRA charitable rollover and requires IRA reporting for state income tax purposes. In those states, the distribution to charity would normally be deductible on state income tax returns, but may be subject to state limits, such as the 60% of adjusted gross income limit for charitable gifts in one year. New Jersey does not recognize the IRA rollover, but because it also does not permit most charitable deductions, the IRA rollover will increase state income tax.

Rollovers from Other Qualified Plans to IRAs


IRA rollovers are generally permitted for most IRAs. There is an exception that does not permit an IRA rollover from a SEP-IRA or a SIMPLE IRA if the employer has made a contribution during the taxable year. However, if an employee has retired and the employer is no longer making contributions to the SEP-IRA, then it qualifies for the Sec. 408(d)(8) IRA rollover. See Notice 2007-7.

Approximately one-third of all qualified plan assets are held in IRAs that qualify for the IRA charitable rollover. However, substantial assets are held in 401(k), 403(b), SEP-IRA and other plans. Under federal tax rules, these and other qualified plans generally may be rolled directly over from the current plan custodian to an IRA custodian. If there is a limitation on rollovers, it is usually due to provisions in the plan document. The plan administrator will upon request disclose any rollover-to-an-IRA limitations.

In Reg. 1.401(a)(9)-7 Rollovers and Transfers, Treasury explains how to rollover from another qualified plan to an IRA. In Question-3 the "transfer of an amount of an employee's benefit from one plan" must follow "special rules for satisfying Sec. 401(a)(9)." In Answer-3 the "transferor plan must determine the amount of the required minimum distribution" and comply "by segregating the amount which must be distributed from the employee's benefit and not transferring that amount. Such amount may be retained by the transferor plan and must be distributed on or before the date required under Sec. 401(a)(9)."

Therefore, before the rollover to the IRA, the retirement plan benefit owner will calculate and take the RMD for that year. Following the RMD payout, the qualified plan is rolled over to the IRA. After the rollover to the IRA, he or she may still make an IRA charitable rollover, but it will not be part of the RMD for that year. In the following year, the IRA owner may make IRA charitable rollovers that will qualify as part or all of the RMD.

IRA Charitable Rollover – Donor Profiles


There are five donor profiles for IRA rollover gifts. The first are the convenience donors who find it a very simple and easy method for an end of year gift. The second is the generous donor, who wants to give past the 60% of AGI limit. The third is a major donor. This person may be a board member or trustee who is looking for a favorable opportunity to make a major gift. Fourth, the Social Security recipient may reduce taxes with an IRA rollover gift. Finally, a standard deduction donor will benefit from a direct IRA to charity gift.

Convenience Donor

The majority of IRA owners delay taking IRA withdrawals until November or December each year. As the individual approaches the end of the year, he or she will need to make decisions. If an IRA owner is actively making gifts to charity during the year, then it may occur to him or her that this is a good opportunity to make a gift.

Convenience donors will contact their IRA custodians to arrange for the IRA charitable rollover. There is no charitable income tax deduction, but also no inclusion in federal taxable income. It is simply a very convenient way to help their favorite charity. Since the convenience donor may be a person with a small or medium value in the IRA, this probably will be the largest numeric category of donors.

Generous Donor

Some very generous individuals are already giving to the 60% of adjusted gross income level. This is the maximum permissible level for cash gifts each year. The excess gifts may be carried forward and deducted over the following five years. Some of these generous donors may also have a large IRA. Since they frequently live at a moderate level in proportion to their income and assets, they may not actually need all of their IRA.

If there is a desire to give more, they can give to 60% of adjusted gross income from their regular assets and then make "over and above" gifts from their IRA. Some generous donors may in effect give 100% or more of income per year through this method. Since the IRA is not included in taxable income, it will have no impact on their regular income and other charitable gifts.

Major Donor

Board members, trustees and other major donors frequently are asked to make large gifts. As the rules have continually become more favorable for IRAs and the required withdrawals have been reduced, large IRAs will continue to grow. Over longer periods of time, there are occasional market dips and drops, but the longer-term trend is positive and large IRAs will continue to increase in value.

For many professionals and business owners, the IRA may even become the vast majority of the estate. They have a need to do some "asset balancing" or there may be major future income tax problems. Therefore, it may be desirable for the major donor to give to charity from his or her IRA. This has the advantage of "balancing" the estate assets.

In addition, there may be income tax benefits. If the donor were to take the IRA into his or her own personal income, there are several types of exemptions that are phased out at higher income levels. Thus, it may actually be preferable to make the gift directly from the IRA rather than making a charitable gift from regular income.

Social Security Donor

Social Security is subject to two levels of taxation. For donors who have income in excess of the first level, 50% of Social Security is taxed. For donors with income in excess of the second level, up to 85% of Social Security income may be subject to tax.

Withdrawing an amount from an IRA will potentially cause the recipient's income to increase from the 50% taxable bracket to the 85% Social Security taxable bracket. Even though the withdrawn amount is given to charity and deducted, there still is taxation at the donor's income bracket. Thus, by making the transfer directly to charity, many Social Security recipients will save substantial taxes.

Standard Deduction Donor

Many seniors do not have a mortgage and their medical deductions are less than 7.5% of adjusted gross income. Thus, they may not have a sufficient level of deductions to itemize and choose instead to use the standard deduction.

If this donor withdraws $1,000 from his or her IRA and then gives it to charity, there is $1,000 of increased income with no offsetting charitable deduction, since the standard deduction is taken. Therefore, it will be preferable for all donors taking a standard deduction to make IRA gifts directly to charity and avoid the additional income tax otherwise payable.

IRA Gift Opportunities


The IRA charitable gifts provision opens up many gift opportunities. Charities and allied professionals will want to explore all of these gift benefits with donors and clients. Everyone will appreciate the flexibility of IRA charitable gifts. As the age wave meets the IRA wave, there are major charitable giving opportunities ahead.

Case Studies on IRA Charitable Rollovers

Teacher Mary and the IRA Rollover Lesson:   Mary Smith is a retired teacher. When she retired, she was given the option to rollover her retirement plan into an IRA. Since she wanted to have control over the investment of the IRA, she decided to rollover her retirement plan into a self-directed IRA.

Bruce - The Generous IRA Donor:   Bruce retired several years ago, but he wanted to be active during his retirement years. So Bruce started volunteering with an organization that helps needy young children.

Ralph - The Major IRA Donor:   Ralph is a retired investment advisor. He watched his IRA blossom and grow through good investments. It now was the largest asset in his estate. Based on his age of 79 and the increased value, his required distribution this year was nearly $100,000!

Gary - The Social Security IRA Rollover Donor:   Gary is a retired manufacturing worker with a substantial IRA. He has some retirement income from CDs and dividends from stocks. With his regular retirement income, his Social Security payments are taxable at 50%.

Judy - Standard Deduction and the IRA Rollover:   Judy was a retired nurse and a volunteer for her favorite charity. During her working years Judy had never enjoyed a large salary.

Gifts from IRAs, Part 1:   Quentin was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best efforts in school, finding a rewarding job and increasing his savings. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could to maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to invest in his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Given his lifetime savings, investment income and Social Security distributions, Quentin does not feel as though he needs the additional income that the IRA distributions will provide - especially with the increased taxes tied to that income.

Quentin has made numerous charitable donations throughout the years and has enjoyed the benefit of the income tax deduction from those donations. On his 70th birthday, Quentin decides that he should have a conversation with his CPA. He is considering taking the RMDs that he would be required to take at 73 and then making a gift of those distributions to charity. That way, he surmises, he will be able to offset the taxation from his RMD with a charitable deduction. Before taking action, however, Quentin decides to call his tax advisor and asks him if this is the best course of action. Is there a better way for Quentin to accomplish his goals?
Gifts from IRAs, Part 2:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and increasing his savings. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to invest in his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Given his lifetime savings, investment income and social security distributions, Quentin does not feel he needs the additional income that his IRA distributions will provide – especially with the increased taxes tied to that income.

Quentin understood that making a gift from his IRA to charity before reaching 70½ would be treated as taxable income (see Part 1). Based on that knowledge, he decided to wait to donate a portion of his IRA to charity until after his "half-birthday." Quentin decides to call his tax advisor to discuss whether donating from his IRA would be the best option for making a charitable gift.

Gifts from IRAs, Part 3:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now in his early 70s, Quentin understands that he will soon be taking required minimum distributions (RMDs) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin does not need the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.

Having spoken with his advisor about making an IRA charitable rollover gift to charity, Quentin is excited to move forward. Quentin is preparing to call his IRA custodian to request a distribution in his name. He will then cash the check and send the proceeds to charity. Before he does so, however, he gives his advisor a call to make sure he is following the proper steps.
Gifts from IRAs, Part 4:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now in his early 70s, Quentin understands that he will soon be taking required minimum distributions (RMDs) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin does not feel he needs the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.

Having spoken with his advisor about making an IRA charitable rollover gift to charity, Quentin is excited to move forward. Quentin is preparing to send the IRA custodian a letter directing a distribution to his favorite charity when he remembers that he has a checkbook associated with his IRA account. Quentin wonders whether he could skip the step of sending a letter to the custodian and just write a check to the charity himself.
Gifts from IRAs, Part 5:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and saving as much as possible. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford to maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now in his early 70s, Quentin realizes that he will soon be taking required minimum distributions (RMD) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin would like to use his IRA to leave a long-lasting legacy.

Each year, Quentin's favorite charity conducts a musical concert with a famous guest conductor. Donors who give $5,000 or more receive two VIP tickets to the concert worth an approximate value of $450.

Quentin wondered whether he could use part of an IRA qualified charitable distribution (QCD) to make his $5,000 gift and receive the two VIP tickets. He asked his trusted advisor if an IRA charitable rollover can be used to receive tickets to charity events.
Gifts from IRAs, Part 6:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and saving as much as possible. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford to maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now in his early 70s, Quentin realizes that he will soon be taking required minimum distributions (RMD) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin does not feel he needs the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.

Quentin has previously discussed with his advisor the possibility of donating to a donor advised fund (DAF). He likes the idea of making a charitable gift now and having the flexibility to advise multiple gifts in the future to charities of his choice from the DAF. Quentin wonders if a DAF would be a good fit to receive his IRA charitable rollover gift. Before contacting his IRA custodian, Quentin decides to give his advisor a call to see if this is the best strategy for him.
Gifts from IRAs, Part 7:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now in his early 70s, Quentin realizes that he will soon be taking required minimum distributions (RMD) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin does not feel as though he needs the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.

After learning about the pitfalls of using an IRA charitable rollover gift to fund a donor advised fund (DAF), Quentin wonders if he can donate to a field of interest or designated fund with his local community foundation. He likes the idea of making a charitable gift to target a specific area of charitable need. Quentin asks his advisor if a qualified charitable distribution could be made to a field of interest or designated fund gift.
Gifts from IRAs, Part 8:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now in his early 70s, Quentin realizes that he will soon be taking required minimum distributions (RMDs) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin does not feel as though he needs the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.

Each year, Quentin's favorite charity hosts an end-of-year holiday fundraising gala. As he has done each of the last five years, Quentin marked the gala on his calendar well in advance. Quentin received a note from the charity reminding him to purchase his ticket soon before the gala sells out.

Quentin wondered whether he could use part of an IRA qualified charitable distribution (QCD) to pay for his ticket to the gala. Quentin reached out to his advisor asking whether an IRA charitable rollover can be used to purchase tickets to charity events.
Gifts from IRAs, Part 9:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now, a few years later, Quentin accepted a job doing what he loved. With this new job, he would like to continue to add to his traditional IRA even though he has reached age 73. He understands that he can make tax deductible contributions to his IRA, if he has taxable compensation. Quentin's required minimum distributions (RMDs) from his IRA have started. Given his lifetime savings, investment income and social security distributions, Quentin does not feel as though he needs the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.

Gifts from IRAs, Part 10:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now, a few years later, Quentin accepted a job doing what he loved. With this new job, he would like to continue to add to his traditional IRA even though he has reached age 73. He understands that he can make tax deductible contributions to his IRA if he has taxable compensation. Quentin's required minimum distributions (RMDs) from his IRA have started. Given his lifetime savings, investment income and social security distributions, Quentin does not feel as though he needs the additional income that the IRA distributions will provide – especially with the increased taxes tied to that income.

Quentin would like to make tax-deductible contributions to his IRA. These tax-deductible contributions to his IRA will lower his taxable income while he is working. Quentin wondered if he could also use his IRA qualified charitable distribution (QCD) to lower his taxable income in the same year. After speaking with his advisor, Quentin discovered that any post-age 70½ contributions to his traditional IRA will reduce the amount of his QCD (see Part 9), but that post-age 70½ contributions to a Roth IRA will not reduce the amount of his QCD. However, Quentin has already begun to make contributions to his traditional IRA. He responds to his advisor to ask if there are other options since he has already made post-age 70½ contributions.
IRA to Gift Annuity, Part 11:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Quentin, age 78, is taking required minimum distributions (RMDs) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin would like to hedge his retirement security and benefit his favorite charity. He has considered creating a charitable gift annuity (CGA) with his favorite charity.

Quentin wonders whether he could use his IRA qualified charitable distributions (QCD) to fund a charitable gift annuity with his favorite charity. He sent an email to his advisor asking whether an IRA QCD may be used to fund a charitable gift annuity.
IRA Gift to Charitable Remainder Unitrust, Part 12:   Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin and his spouse, Kelly, worked for companies that offered a 401(k) plan. During those years, they put as much into their 401(k) as they could afford to maximize the benefit of employer matching contributions. Eventually, both spouses moved on to other employment and made a tax-free rollover of their 401(k)s into IRAs. As they approached retirement, they continued to contribute to retirement savings by maxing out their IRA contributions each year.

With their lifelong penchant for saving money and some savvy investing, they comfortably retired at age 65. Now, a few years later they are taking required minimum distributions (RMDs) from their respective IRAs. With their lifetime savings, investment income and Social Security distributions, they would like to hedge their retirement security and benefit charity. They have considered creating a charitable remainder unitrust (CRUT).

Quentin and Kelly wonder if they could use their IRA qualified charitable distributions (QCD) to fund a charitable remainder unitrust with their favorite charity. They sent an email to their trusted advisor to see if this arrangement of using an IRA QCD to fund a charitable trust is possible.

      Quiz-Basic



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