Investor

11/06/07 - Qualified Charitable Distributions - Time is running out

By: Rob Gordon, CFP®

Exactly one year ago, a colleague of mine, wrote an article for this newsletter regarding important legal updates to IRAs (click here for article.) Included among those updates was a unique opportunity to use an IRA to fulfill charitable objectives. Set to expire at the end of this year, the Qualified Charitable Distribution (“QCD”) simplifies charitable gift giving from an IRA.

Who Qualifies?

IRA owners who are over age 70 ½ and are satisfied that their retirement income goals are sufficiently funded, have until December 31, 2007 to take advantage of this exception to IRA distribution rules. Prior to the passage of the Pension Protection Act of 2006 (“PPA 2006”), using your IRA to make a charitable contribution required that the distribution amount be included in the donor’s taxable income. Donors who itemize and who would otherwise have their charitable contribution reduced by either the percentage of income limitation or by the itemized deduction reduction may find this temporary amendment most beneficial.

Funds from a QCD must go directly from the trustee of an IRA to a qualified public charity. The maximum amount eligible for this transfer is $100,000 per taxpayer per taxable year (potentially $200,000 if a taxpayer and his/her spouse each own at least one IRA). The funds may not be contributed to a donor-advised fund, a supporting organization or charitable trusts. Likewise, because an individual may not receive a benefit in return for an IRA charitable distribution, a charitable gift annuity would not be eligible for the tax-free treatment. A qualified charitable distribution to a private operating foundation or to a private foundation is permissible if it meets specific requirements detailed in the Internal Revenue Code regarding conduits in the year of the distribution.

Key benefits of this provision include:

• The opportunity to make charitable gifts that exceed 50% of adjusted gross income.
• The QCD can be counted as all or a portion of the required minimum distribution of the taxpayer for 2007.
• Since retirement plan accounts are potentially among the most highly taxed assets in a person’s estate, a QCD can be a relatively simple way to reduce that exposure.

Caveats

The QCD certainly simplifies the process of making a charitable donation with funds from an IRA. However, special care is required when dealing with a QCD from an IRA which contains non-deductible contributions. In those cases, the amount of the distribution is first applied to the taxable income portion. If the distribution amount exceeds the taxable income portion of the IRA, then non-deductible portion of the IRA are applied to the remainder of the charitable distribution. Where multiple IRA accounts are involved, they are all considered as one IRA for the recognition of non-deductible and deductible contributions.

Similar to non-QCD cases, be aware that if a donor receives any goods or services in exchange for, or as part of, their gift, the rollover of assets from an IRA most likely will not qualify for tax-free treatment under this provision. IRS Publications 1771 and 526 on Disclosure Requirements and Charitable Contributions are excellent resources for the tax treatment of charitable contributions. Both publications are available at http://www.irs.gov.

Compared to the process before PPA 2006, the Qualified Charitable Distribution is easy to implement. Most custodians are equipped to handle the distribution and most charitable organizations can provide the appropriate substantiation of the gift. If charitable giving is a part of your life today or if you were looking for the perfect chance to make it a part of your life, there could not be a more suitable time than now. Remember, there are only three months left to take advantage of this opportunity – time is running out fast!

Of course, seek competent legal and tax counsel before moving forward with this and be cognizant of the interaction of this strategy with your state and municipal tax regimens.

Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

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