By Jared Lindell
Since 1974, millions of Americans have saved billions of pre-tax dollars in Individual Retirement Accounts (IRAs). Thanks to continued savings and investment returns, an estimated $3.6 trillion is currently invested in IRAs, and the total continues to grow. In late August, a federal law was enacted with a provision allowing IRA owners to share the wealth of their retirement savings by giving directly to charity, without first counting it as income and paying income tax. This new law is known as the Pension Protection Act of 2006.
Thanks to decades of deliberate savings and favorable investment returns, a substantial share of today’s retirees have more money than they will need to live on saved in their IRAs. Many of these individuals have expressed interest in giving to charity. However, income tax must be paid on all withdrawals, which sharply reduces the value of the gift, making these individuals more reluctant to give. Others have asked about designating their children as beneficiaries, but that may draw additional tax consequences. For larger estates, a good portion of IRA wealth goes to estate taxes and income taxes of beneficiaries. Due to this, experts estimate that heirs will receive less than 25% of most IRA assets that pass through estates.
This is where the key benefit of the Pension Protection Act of 2006 comes in. Countering all the aforementioned tax burdens, a provision within the Act creates a new option for donors and retirees. It allows the transferring of IRA assets directly to a charity, such as the Community Foundation. By going directly to the charity, the money is not included in the owner’s income and, most importantly, is not taxed, preserving the full amount for charitable purposes. The law covers all gifts made this year and next (2006 and 2007).
More specifically, in 2006 and 2007, holders of traditional and Roth IRAs who are at least 70.5 years old can make direct charitable transfers up to $100,000 per year. As a qualified public charity, the Community Foundation can help donors execute the transfers and choose from several charitable fund options for their gift. The only fund type that does not qualify for tax-free IRA transfers are donor-advised funds.
Therefore, this new Act serves as a win-win for both the donor and the Community Foundation. For donors, it is yet another way to leverage personal assets and use them for charitable purposes, while avoiding tax consequences. For the Community Foundation, it is another way to provide donors with a means to their charitable giving, while helping donors utilize assets saved within their IRAs.
Again, it should be stated these tax-free charitable transfers from IRAs to charities is only for a limited time, as the Act is set to expire in 2007. At the time, Congress may extend the Act but there are no guarantees. In the meantime, for anyone interested in establishing a permanent legacy in the community, this is the opportunity of a lifetime to make the gift of a lifetime.
If you would like more information on the Pension Protection Act of 2006, contact the Community Foundation staff at 661-3390.
Published in the September 24th edition of The Post-Journal