Seniors can take advantage of charitable rollovers

Last April, I penned an article on IRA Charitable Rollover opportunities extending through 2009. Because of its extreme importance, and the year rolling to an end, I felt it important to reiterate some of the key provisions before this opportunity expires.

As part of the Emergency Economic Stabilization Act of 2008, Congress allowed an important window of opportunity to remain open - one that enables IRA owners age 701⁄2 or older to directly transfer up to $100,000 tax-free to charity in both 2008 and 2009. Because this provision applies to every individual IRA holder, a husband and wife who both meet the minimum age threshold could effectively move $400,000 out of their taxable estate over the next two tax years.

The ability to transfer money tax-free from your IRA to contribute to a charity can be an excellent way to advance both your philanthropic and estate plans. While you will not receive a charitable deduction for a transfer from your IRA to a charity, the amount of your transfer will never be included in your gross income.

If you fit any of the following profiles, I encourage you to contact your financial and tax adviser before year-end to help determine if this provision is appropriate for you.

Any IRA holder who has reached the age of 701⁄2, is eligible to make the tax-free transfer of funds from his or her IRA to a public charity. Also at 701⁄2, the IRA holder starts to receive the taxable required minimum distributions (RMDs) from his or her IRA. Accordingly, at year-end, many charitable-minded IRA holders with excess RMD amounts would prefer to use these funds for charitable contributions. The 2006 Pension Act permits an IRA holder to distribute either a portion or all of his or her RMD tax-free directly from his or her IRA by transferring any amount up to a total of $100,000 to a favorite qualified public charity. The IRA holder reduces his or her taxable income by the amount distributed and the charity receives a contribution.

IRA assets are subject to estate taxes and estate beneficiaries may have to pay income taxes on IRA assets they inherit. Using the IRA charitable distribution provision permits an IRA holder to reduce the size of his or her estate, thereby reducing the total amount of taxes imposed.

Many retirees take the standard deduction when calculating their income-tax liability because they don't generate enough deductible expenses or income to make itemizing worthwhile. As a result, they could be losing out on the tax advantages of deducting their charitable donations. An IRA holder who uses the tax-free IRA charitable-distribution provision as a way to make charitable contributions will be able to obtain the tax benefit of the contribution without having to itemize his or her deductions.

An IRA holder who collects Social Security also is required to receive the RMD from his or her IRA at age 701⁄2. The amount of the RMD could increase income to a level where a portion of your Social Security benefit is taxable. By using the IRA charitable distribution provision, the IRA holder may reduce total income and thereby reduce the taxes imposed on Social Security benefits.

Typically, a donor may only deduct a cash contribution to a charity up to 50 percent of his or her adjusted gross income (AGI) in any given year. Any excess charitable contribution deductions are carried over to the following five years. By using the tax-free IRA charitable-distribution provision to transfer money directly from an IRA to a charity, the donor effectively "skips" the 50 percent AGI charitable deduction limitation. Therefore, an IRA holder may donate up to $100,000 per year in 2008 and 2009 from his or her IRA without having to worry about the 50 percent AGI charitable deduction limitation. An IRA holder who has a large IRA may use this method to reduce its size during his or her lifetime leaving less exposed to income and estate taxes at death.

Any IRA holder who takes advantage of the tax-free IRA charitable distribution must send a letter to the qualified charity informing the charity of the donation. You must be 701⁄2 on or before the date of the charitable transfer and you should consult your IRA custodian about a donation to arrange for the proper transfer of funds from your IRA to the charitable organization.

Cash donations, regardless of whether the contributions are made from an IRA or another source, must be backed up by "proper" records, such as a check, bank copy of the check, electronic funds transfer record, credit card or credit union statement, payroll stub or W-2 (in the case of a payroll deduction). These must show the name of the charity, the donation amount and the date paid or transaction posting date. A written acknowledgment from the charity showing that information also will suffice.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at william.a.creekbaum@smithbarney.com or 689-8704.