IRA Charitable Rollover
SPECIAL NOTE: The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) — waives RMD obligations for the 2020 tax year. With RMDs suspended for 2020, you can wait until 2021 before you must take your next minimum distribution.
The IRA Charitable Rollover allows the following:
- Clients and eligible spouses can make an IRA charitable rollover (up to $100,000) to a qualified charity and not have that transfer count towards their taxable income in the same year that they made the charitable gift.
- Charitable rollover amounts could count toward the client’s required minimum distribution.
Please note that if a donor makes a direct distribution from their IRA to a charity where those funds were put in a donor advised fund, the donor is still required to claim those monies as income and they cannot be characterized as a charitable rollover.
How to use your Required Minimum Distribution (RMD)for your Charitable Legacy with American Endowment Foundation (AEF)
While the IRS has specifically excluded donor advised funds from the IRA Charitable Rollover provision, there are several strategies that we have implemented previously for many clients:
- The donor can make distributions from the IRA in the traditional way, recognize the distribution as income, contribute those dollars to a donor advised fund at American Endowment Foundation and calculate the charitable deduction in the normal way. The charitable deduction tends to offset the increase in taxes resulting from the traditional distribution, subject to annual Adjusted Gross Income (AGI) limits.
- If the donor is looking to maximize the full $100,000 withdrawal, allowable in the IRA Charitable Rollover provision, American Endowment Foundation offers other fund types that do qualify for an IRA Charitable Rollover such as:
Scholarship Fund: A donor can establish a scholarship program at a school of their choice through AEF. The donor can work with the school to determine the criteria the school will use in screening and selecting scholarship applicants. According to a predetermined schedule, AEF makes a specific grant distribution to the school which, in turn, awards scholarship grants to qualifying applicants ... virtually forever.
Designated Fund: A donor can create a designated fund at AEF to support a specific charity of their choice. According to a predetermined schedule, AEF makes a specific grant distribution to the charity…virtually forever.
Of interest to financial advisors, they can continue to manage the value of their client’s assets after they engage in an IRA Charitable Rollover. Those assets can be managed at all levels on the advisor’s familiar platform.
Who Could Benefit From an IRA Charitable Rollover?
If charitable deductions are not itemized -
- IRA rollovers especially benefit the nearly 40% of Americans who do not itemize deductions and therefore do not receive a tax benefit for their charitable contributions.
If charitable gifts already exceed 60% / 30% limits of expected adjusted gross income for 2018 -
- This allows the donor to skip by these limits and give more.
If Social Security income is taxable -
- By avoiding the recognition of taxable income, the donor may have less of their Social Security income subject to income tax.
If donor is a resident of Ohio, Indiana, Michigan, New Jersey, Massachusetts or West Virginia -
- These states provide no income tax break for charitable contributions.
Future estate tax implications -
- The combination of estate and income taxes on IRA assets can produce an effective tax rate of up to 80%. The Charitable IRA Rollover exclusion gives individuals the opportunity to remove up to $100,000 of these assets from their estate with no tax consequences. Spouses can rollover up to $100,000 as well if qualified.
What Are The Rules for Using an IRA Charitable Rollover?
- Individuals have to be over the age 70 ½ (72 if born July 1, 1949 or after)
- Rollover cannot exceed $100,000. Amounts more than $100,000 will be added to taxable income.
- The rollover must be completed by December 31 of the year in which the contribution was to count against taxable income.
- Rollovers can only be made from traditional IRAs. Rollovers from 403(b) plans, 401(k) plans, pension plans, and other retirement plans do not qualify. Funds must come DIRECTLY from the plan administrator to the charity.
At American Endowment Foundation, we look forward to discussing your circumstances and helping determine which of the funds may be best for your interest. Contact us or call at 1-888-966-8170.
Note: The information provided herein is for informational purposes only and should not be interpreted to constitute legal and/or tax advice. Donors should consult their legal and tax advisors regarding their specific situations.
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