IRA can't go directly to a charity

Money Talk

Your Money

September 26, 2004|By MATT LUBANKO

Is it possible to give a regular IRA directly to charity?

- J.T., Baltimore

No. "You cannot give an IRA directly to charity," said Ed Slott, a certified public accountant and publisher of Ed Slott's IRA Advisor.

The only way to make a charitable donation through an individual retirement account is to withdraw money from the account. Withdrawals from regular IRAs, with few exceptions, are taxed as ordinary income, Slott said.

Under tax laws, $10,000 withdrawn from an IRA - for people taxed at a rate of 15 percent - would be worth $8,500 after taxes. That $8,500 is still a sizable charitable donation but not quite as large as the $10,000 you might like to [but cannot] donate directly through an IRA.

Is it possible to take money from my Keogh plan and roll it over to a SEP IRA?

- A.P., Allentown, Pa.

Not only is it possible, but in most cases it's desirable. Keogh plans, with few exceptions, offer no advantages over the SEP IRA, said Barry Picker, a Brooklyn, N.Y., certified public accountant who specializes in retirement planning.

A Keogh plan is not as kind to your heirs as a SEP IRA. "Non-spouse beneficiaries" are usually forced to liquidate the account in the year it is received; the proceeds from this liquidated account are taxed as ordinary income, Picker said.

The SEP (simplified employee pension) IRA, is also comparatively simple from a legal standpoint. (See IRS Form 5305-SEP for details.) And a Keogh-to-SEP IRA rollover can be completed, in most cases, without hitches, said several sources with mutual fund firms.

Rollovers often make sense because a SEP IRA offers an additional benefit a Keogh often lacks.

"When you leave a SEP IRA to heirs who are not your spouse, your heirs have the power to stretch out withdrawals over their lifetimes," Picker said. This right for SEP IRA beneficiaries to take federally mandated withdrawals over a lifetime often helps people save money on taxes, Picker said.

Visit the IRS Web site ( and type "SEP IRA" into the home page's search engine. IRS Publication 3998 offers brief but thorough explanations of various retirement plan options available to small-business owners, including sole proprietors. IRS Publication 560 (Retirement Plans for Small Business) is also helpful.

My financial adviser told me your July 18 column on variable annuities was grossly unbalanced. How could you be so negative when my adviser seems to think variable annuities are a great deal?

- D.W., Chicago

Let's be blunt. I did not intend to present a balanced picture of variable annuities and said so in the column.

The insurers who make variable annuities and the financial advisers who sell them don't need my help to push this product. Variable annuities hold about $1 trillion in assets. These assets generate about $22 billion in yearly fee revenue for life insurers.

The financial advisers who sell variable annuities easily rake in $5 billion to $6 billion in yearly commissions, based on industry data that says variable annuity sales topped $140 billion last year.

These commissions are often "invisible" to variable annuity buyers. The life insurers pay the advisers lofty commissions (typically 4.5 percent or more of cash invested) and recoup that expense through fees they charge on the money you've invested, which they expect to hold and manage for at least seven years.

Facing such financial might and so well-oiled a sales machine, a personal finance columnist is clearly outgunned. Yet the gun I hold is a gun I intend to fire.

And the shot consumers should heed is that variable annuities are often expensive and illiquid. They are complicated investment contracts which even financial advisers have trouble understanding. With rare exceptions, they should not be held inside tax-deferred retirement accounts such as 401(k)s or IRAs. They should not be sold to, or bought by, people age 70 and older. And people should not buy a variable annuity without first making the legal maximum contributions to IRAs, 401(k)s and other lower-cost retirement savings plans.

Matthew Lubanko is a columnist for The Hartford Courant, a Tribune Publishing newspaper.

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