After learning of the popularity of my last post on our At the Table blog—about the effects of tax reform—it’s time for me to take my writing seriously. I’d like to think the high readership was because of the important content I presented, but I suspect the reason is that there was an appealing photo of a dog in that post (see here) and word got out about it.
So, I’m going all in again with animals. All I’m asking is this: In exchange for watching the brief video of my colleague Alicia’s adorable cat that I’ve embedded below, you have to read the rest of my post about the IRA Charitable Rollover technique—which I think you’ll see can be quite useful. Not a bad deal, is it? So, here’s the video:
…and, we’re back. That was great, wasn’t it? A cat standing in a sink and drinking out of a faucet! Who knew that could happen?
Now let’s get serious. But not gloomy, because, again, the IRA Charitable Rollover can be most helpful in your tax planning.
Congress first enacted this technique, officially called a “qualified charitable distribution,” in 2006, and made the technique permanent in 2015. It can make charitable giving from IRAs exceedingly easy, which is generally not the case for giving from retirement plans during a donor’s lifetime.
Here’s an example to illustrate the problem and how this technique can help:
The facts: Bill Taxnovitch, age 72, has a sizable IRA. Bill is very charitably inclined. He is already planning to leave this IRA to charity—let’s say The Columbus Foundation (what a coincidence!)—at his death. His gift will establish the William Taxnovitch Fund, a Designated Fund at the Foundation that will serve as a permanent endowment for his alma mater, his house of worship, and—what else?—the shelter where he adopted his beloved pet cat.
Bill would like to kick-start the William Taxnovitch Fund with a lifetime gift from his IRA. His financial advisor tells him that he can give away up to $100,000 from his IRA in 2019 without affecting his lifestyle. Bill is retired, and he has chosen tax-efficient investments, so his adjusted gross income (AGI) for his tax purposes in 2019 is just $40,000 (not including any IRA withdrawal).
The problem under prior law: Bill’s only option was to make a withdrawal of $100,000 from his IRA each year, bring this amount into his gross income for federal income tax purposes (assuming the IRA is made up of only deductible contributions), and hopefully offset the income fully with a deduction for a $100,000 cash gift to charity in the same year.
However, the tax law imposes an annual limitation on the federal charitable income tax deduction, based on a percentage of the donor’s AGI: 60 percent in the case of cash gifts. So, Bill’s deduction in 2019 would be 60 percent of his AGI of $140,000 (as enhanced by the $100,000 IRA withdrawal), or $84,000 in this example. Therefore, $16,000 of the $100,000 income would go unsheltered by the federal charitable income tax deduction.
Worse yet, the state of Ohio offers no charitable income tax deduction, so under the above scenario, if Bill is an Ohio resident, the entire $100,000 withdrawal would be subject to Ohio income tax each year. Bummer..
How the IRA Charitable Rollover makes this better: Bill can ask his IRA provider to transfer $100,000 from his IRA to The Columbus Foundation in 2019, for the William Taxnovitch Fund. Bill brings nothing into his income for federal or Ohio income tax purposes, and by the same token, he receives no income tax deduction. In other words, the giving decision is based on Bill’s charitable desires and his financial ability to make a gift, and the tax convolutions described above go away—a good thing!
Basic features of the IRA Charitable Rollover (for tax geeks: see Internal Revenue Code Sec. 408(d)(8) and IRS Notice 2007-7):
- A donor must be age 70 ½ or older at the time of the rollover (note: at that time, not just in the year of the rollover). Tell your family and friends to mark their calendars and bring you half of a cake to celebrate this important milestone in your life!
- The Rollover is limited to $100,000 per year per donor.
- The Rollover can be used to satisfy a donor’s annual required minimum distribution.
- The Rollover can be made only from traditional or Roth IRAs, and not from any other type of retirement plan, such as a 401(k) plan or 403(b) plan.
- No Rollover is permitted to charitable remainder trusts or other “split-interest” vehicles which, in short, benefit individuals and then charity.
- No Rollover is permitted to certain charitable grantmaking vehicles, including most private foundations, supporting organizations and, unfortunately, Donor Advised Funds—a donor favorite for their flexibility and convenience.
- But the Rollover can be used to fund other types of charitable giving vehicles at community foundations, such as Designated, Scholarship, Field of Interest or Unrestricted Funds. And stay tuned: There is an effort afoot to convince Congress to eliminate the carve-out for Donor Advised Funds.
- The Rollover won’t work where there are certain kinds of quid pro quo benefits provided in exchange for the Rollover, such as a fundraising dinner or a golf tournament.
What type of donor might want to take advantage of the Rollover?
- Donors who do not itemize their federal income tax deductions, because the standard deduction is larger. If you think about it, the IRA Charitable Rollover creates a sort of “backdoor” deduction.
- Donors whose AGI is too small to allow them to take their IRA withdrawal into their own hands, and use the charitable income tax deduction to offset completely the income generated by the withdrawal.
- Donors residing in states such as Ohio where there is no charitable deduction for state income tax purposes.
Back to Bill, the donor in our example above. His cat has overheard this entire discussion, and is gazing at Bill right now. And that gaze is not the contemptuous glare that we can sometimes get from our cats. No, instead, it is a look of love. It is a look that says, “Bill, you beautiful man, you… I might just come over there and let you pet me right before I go back to destroying the couch with my claws.”
Want to talk more about the IRA Charitable Rollover? Feel free to contact me or any of my colleagues in the Foundation’s Donor Services and Development Department. As always, we are here to help your giving remain effective and easy.
About The Columbus Foundation
The Columbus Foundation serves nearly 3,000 individuals, families, and businesses that have created unique funds and planned gifts to make a difference in the lives of others through the most effective philanthropy possible. Now 75 years strong, The Columbus Foundation is Your Trusted Philanthropic Advisor® and is one of the top ten largest community foundations in the country.
