IRA Alert

Ed Slott

Pay attention to charitable IRA rollovers

Planning with a provision that doesn't exist is among the uncertainties for 2012 tax returns

Nov 11, 2012 @ 12:01 am

ualified charitable distributions haven't yet been reinstated for this year, though Congress may do so, as it has in the past. QCDs are a tax benefit for charitably inclined individual retirement account owners or beneficiaries.

The QCD provision allows IRA owners or beneficiaries who are 701/2 or older to transfer up to $100,000 per year directly from their IRA to a charity. The IRA distribution is excluded from income.

As a result, the distribution does not increase adjusted gross income.

Congress won't let your clients double-dip, though. Because the IRA distribution is tax-free, no charitable deduction can be claimed.

The benefit is that AGI is lower, which can allow more tax deductions and credits. QCDs don't apply to distributions from any employer plans such as 401(k)s.

QCDs must be made to organizations qualified by the Internal Revenue Service to receive tax-deductible contributions.

The provision doesn't apply to gifts made to grant-making foundations or to donor-advised funds.

Split-interest gifts don't qualify because of a rule that the QCD must be a contribution that would be 100% deductible if paid from the owner's non-IRA assets. Thus QCDs can't be made to a charitable-gift annuity or a charitable remainder trust.

In addition, clients are prohibited from receiving anything in exchange for their donation, such as tickets to a concert.

QCDs apply only to those IRA owners or IRA beneficiaries 701/2 and older on the date of the distribution from their IRA (or inherited IRA).

DIRECT TRANSFER

The funds must be transferred from the IRA custodian directly to the charity. In other words, clients can't take a distribution from their IRA and then write a check to the organization they have selected.

If they do, the income will be included in AGI, and the donation will be eligible, at best, to be an itemized deduction, even if the QCD rules are retroactively reinstated.

Distributions from an IRA first go toward satisfying a client's required minimum distribution. This rule applies to QCDs, but favorably so.

The charitable donation from an IRA will satisfy an RMD, but the IRA distribution isn't included in income.

In effect, your client's RMD becomes income-tax-free for the year to the extent of the charitable distribution. This is a great benefit because the QCD doesn't increase your client's AGI like a normal RMD would.

Thus clients won't lose out on any tax deductions and credits that would otherwise be reduced by a higher AGI. Clients can contribute more than their RMD if they wish, up to the $100,000 annual limit.

If your client hasn't yet taken an RMD for this year and was planning to give money to a charity anyway, consider sending the RMD amount or the portion he or she wishes to contribute directly from the client's IRA to the charity.

If QCDs aren't reinstated, your clients will be in the same position that they would have been in if they had actually received their RMD and then made a charitable contribution. There is no downside risk to doing so.

On the other hand, if QCDs are reinstated, your clients will be in a better position because the RMD will be satisfied through a tax-free QCD.

If your client already has taken an RMD this year, it can't be rolled back into the IRA for use as a QCD. RMDs can never be rolled over.

Although some advisers have told their clients to hold off taking their RMD so if QCDs are restored, they can take advantage, it is risky to wait until the last minute. For clients who turn 701/2 in late December — or older clients hoping for the renewal of QCDs — it may be very difficult to get the IRA custodian to process any distribution so late in the year.

For a married couple in which each spouse has his or her own $100,000+ IRA, each spouse can contribute up to $100,000 for a total of $200,000. If more than $100,000 is withdrawn from the IRA and contributed to a charity, there is no carryover to a future year.

The excess is taxable income and a charitable deduction can be claimed if the taxpayer itemizes.

Charitable-substantiation rules apply to QCDs. The donor should get a receipt and a confirmation that no goods or services were received in exchange for the donation.

Remember: Charitable distributions aren't in effect. Pay attention so that if this provision is reinstated, you can immediately take whatever action is required for your clients.

Ed Slott (irahelp.com), a certified public accountant, created The IRA Leadership Program and Ed Slott's Elite IRA Advisor Group.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

Using data to improve client conversations

What can you do to create better conversations with clients? Marc Butler of BNY Mellon Pershing's Albridge says data can help you have the next best chat.

Latest news & opinion

Meet our new 40 Under 40s

For a fifth year, InvestmentNews is proud to shine a spotlight on the amazing accomplishments and potential of top young financial professionals.

Merrill re-evaluates commission ban in retirement accounts

The wirehouse's wealth management group announces a fresh look at the ban now that the DOL rule is on the brink of death.

10 biggest retirement mistakes

Adhere to enrollment deadlines and distribution rules or pay a hefty penalty.

Finra to overhaul broker information system, cut compliance costs for broker-dealers

The move is intended to cut compliance costs for firms as well as make the registration and disclosure process more efficient.

SEC rule proposal doesn't include 401(k) sponsors in 'best interest' advice

Plan sponsors are left out of the equation because they don't appear to fall within the definition of "retail" investor, legal experts say.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print