Hello everyone...

Just recieved this question from a Mutual Funds Magazine reader:


"Is there provision for transfer of a portion of
an IRA (rollover) to a charity prior to death without triggering a tax
liability? I am now widowed with no children, and my present income is
adquate for my needs, retired for 19 years in September, and don't wish to
make a normal IRA withdrawal, take credit as a charitable deuction and pay
fed & state income tax."

Any thoughts? What are some common pitfalls this reader might need to be aware of?

Thanks very much,

Jason Van Steenwyk
Reporter
Mutual Funds Magazine
954-229-6907

Distributions from an IRA are subject to income taxation even if made to a charity.The taxpayer receives a charitable deducton if deductions are itemized. But charitable deductions of cash are limited to 50% of AGI. Excess is carried over to future years. Taxayers whose AGI exceeds a threshold amount are subject to 3% reduction in itemized deductions. Transfer to charity is a non taxable gift under the gift tax law. Transfer of IRA assets to charity at death is exempt from estate taxation.

I would ask how she knows now that she will not need the IRA assets she is willing to give away in future years. Inflation increases about 3% a year which means in 12 years the purchasing power of a $1 declines by about 1/3rd. Also there may be a need for assisted living or nursing home care which in the northeast can cost $7000 a month. She should take the min distributions, pay tax on it and invest the funds as a savings account. Best option is to make the charity a beneficary of her IRA at death or bequeath her estate to the charity.

The concept of a direct transfer of an IRA to charity during lifetime comes up in proposed legislation from time to time. The current bill that would allow nonitemizers to take charitable deductions included this kind of provision at one time (it may still be there).

She should be sure that the charity is named as beneficiary at her death and hope that Congress makes it easy to do what she wishes.

The proposal to allow direct charitable transfers are not doable because of the risk of tax evasion- Under current law the maximum charitable income tax deduction is limited to 50% of AGI.
Allowing taxpayer to transfer the value of the entire IRA directly to a charity would prevent the IRS from policing the 50% requirement unless the charity was required to submit a burdensome notice to the IRS of the receipt of the amount of the IRA from the taxpayer and many charities would be reluctant to give such info to the IRS.

Hi - Currently there is legislation pending (referred to House Ways and Means) to allow for direct transfers to charity. However, without this legislation (which has not passed in the past) the transfer is treated as a withdrawal followed by a charitable contribution. Thus, limitations might apply or the itemized deduction may be phased out and therefore the income may not be fully offset by the deduction. There is a link on this site to prior proposed legislation and the explanation which can be found by searching for the phrase "charitable IRA".