IRA giving can earn tax break

Your Money

October 29, 2006|By Janet Kidd Stewart | Janet Kidd Stewart,Chicago Tribune

Older Americans can give portions of their retirement funds to charity and collect some nice tax breaks in return, but they'll have to act fast.

Under legislation signed into law this year, individual retirement account holders older than 70 1/2 can withdraw in 2006 and 2007 up to $100,000 from the accounts tax-free if it goes to charitable organizations. And while the money is excluded from taxable income and thus not eligible to be deducted again on tax returns, it does count toward the account owner's required minimum distribution for IRA withdrawals.

"It's really the most significant break charities have received from the government since donor-advised funds," said William Raabe, a senior lecturer in accounting and tax issues at Ohio State University in Columbus, referring to the decade-old funds that allow taxpayers to contribute to an account and take a tax deduction, then later recommend a charity to receive the money.

Donor-advised funds, however, don't qualify for the new breaks, nor do charitable remainder trusts and foundations. Contributions must be made directly from the retirement account to a charity, and financial institutions are scrambling to put systems in place for handling donation requests.

By keeping withdrawals out of taxable income, donors also receive some tax help in other ways, said Jere Doyle, a Boston-based senior vice president for Mellon Financial Corp.'s Private Wealth Management Group.

For example, medical expenses can be deducted only if they reach at least 7.5 percent of adjusted gross income. By lowering your adjusted gross income, potentially more of your medical expenses could be deductible, Doyle said.

It's also a boost for taxpayers who don't itemize deductions, because the new rule simply allows the money to be excluded from income.

Using your required minimum distributions for charity also could keep Social Security payments from being subject to income tax because of your lower taxable income, he said. And it gets more money out of your name that could be subject to estate taxes.

"My clients over 70 look at these required distributions as a major distraction. They have other incomes that are supporting retirement and view these distributions as a nuisance," said Austin Frye, a financial planner in Aventura, Fla. The new rule gives wealthy IRA owners a way around that while also doing good, he said.

"We had hoped this provision would have been made permanent, and we'd hoped gifts could be made to donor-advised funds," Doyle said.

But is making these donations necessarily a good idea? Tax breaks aside, today's seventysomethings quite possibly could live another quarter-century. That's a long time to cover living expenses and inflation, even for very large portfolios.

And yet retirement is a time when some people begin to think about leaving a legacy and giving back to society.

People who are 65 or older tend to give a relatively consistent percentage of their wealth to charities regardless of income bracket, in contrast to people in younger age groups who vary their giving more dramatically by income, said Tim Stone, executive director of NewTithing Group, a San Francisco organization that encourages philanthropy.

Some in retirement worry that money donated today will jeopardize their standard of living later.

Doyle recalled a client who resisted making $10,000 gifts to her grandchildren as a way to spend down her estate to avoid hefty taxes, even though she was 96 and her estate was worth $5 million.

"A lot of these people lived through the Depression, remember the soup lines and maintain that mentality, even if they're high-net-worth individuals," he said.

A couple of final caveats: If you are unsure about whether you can truly give away a chunk of your retirement accounts, go to and plug your nest egg into the site's Retirement Income Calculator, minus your proposed donation. It calculates whether that sum will get you through retirement, using computer models that simulate thousands of market scenarios. (From the home page, click on "individual investors," then under "select a shortcut" select the "access tools and calculators.")

Don't forget to check out the paperwork on making the gift. Some states might not recognize the rollover as tax-free, and some fund companies might require special documentation.

Have a retirement question? Write to, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, Ill. 60611. If your letter is selected, we may include you and your question in a future column.

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