Wilkes University

IRA Rollover Provision

Congress Passes IRA Rollover
On August 17, President Bush signed into law the Pension Protection Act of 2006 (PPA 2006). Among its 900+ pages, PPA 2006 includes a mélange of provisions designed to promote charitable giving, and others that increase scrutiny of it. The provision that has drawn the most attention from the planned giving community concerns IRA rollovers to charity made during a donor's life.

The IRA rollover provision
The IRA rollover provision allows otherwise taxable distributions of up to $100,000 from a traditional individual retirement account (IRA) or a Roth IRA to be excluded from gross income. In addition, the amount rolled over will count against a donor's minimum distribution requirement. As in previous versions of IRA rollover legislation, there is no federal income tax deduction available for these contributions in addition to their exclusion from income.
How does the IRA rollover differ from past tax treatment? Prior to PPA 2006, a donor had to report a withdrawal from an IRA as income and then declare an offsetting income tax deduction for the charitable contribution. Due to a variety of tax rules, including deduction limitations and phase-outs, the net effect of increasing income and then declaring a deduction was an increase in taxes for many potential donors.
The new legislation offers a welcome incentive to donors who want to use the money in their IRAs to make charitable gifts. The legislation makes the process simple and assures these donors that their gifts will not increase their taxes. Donors will need charitable intent, however. Although making an IRA rollover gift creates no new income to report or taxes to pay, the donor is still giving money away and that money is gone. If a donor in the 35% tax bracket withdraws $100,000 from an IRA and keeps it, for example, he will pay $35,000 in income tax and keep the remaining $65,000.  If the donor rolls over the same $100,000 to charity instead, he keeps none of it and is out $65,000 in after-tax dollars, but also has the satisfaction of giving $100,000 to a cause he supports.  Note that Roth IRA distributions ordinarily are not taxable, so the tax benefits of the new IRA rollover don’t really apply to Roth IRAs.
Donors to whom the new IRA rollover likely will appeal include:
  • Donors already giving at their 50% deduction limit
  • Donors whose income level causes the phase out of their exemptions
  • Donors who don’t itemize their deductions
  • Donors for whom additional income will cause more of their Social Security income to be taxed
To qualify for IRA rollover treatment, the donor must direct the IRA manager to transfer funds directly to charity. A withdrawal followed by a contribution will still have to be reported as income. The donor must be at least age 70½ and the donee must be a tax-exempt organization to which deductible contributions can be made. Donor advised funds and supporting organizations are not eligible. The gift must be outright; rollovers to a planned gift, such as a gift annuity or a charitable remainder trust, do not qualify. Neither do outright distributions to charity from employer-sponsored retirement plans, such as Simple IRAs, 401(k)s, and 403(b)s. Also note that IRA rollovers may be includable in a donor’s income for state and local tax purposes and may not earn an offsetting charitable deduction, depending on state and local law. The provision is effective only through December 31, 2007.

While the new IRA rollover is limited in many ways, it still presents an exciting opportunity for fundraisers to encourage outright charitable gifts from a vast store of wealth -- in 2005, over $1.6 trillion of IRA money was invested in mutual funds alone -- that previous tax treatment made difficult to tap. Fundraisers will do well to promote the donation of IRA assets during the rest of 2006 and in 2007. More details on PPA 2006 and on gifts of retirement plan assets in general will appear in an article by Frank Minton, President of our Planned Giving Services Division, in the October issue of Planned Giving Today
The new IRA rollover is welcome news, but bears only a passing resemblance to the legislation the planned giving community has been advocating to Congress for the last 10 years. The new law excludes all split interest gifts, it limits gift amounts to $100,000 or less, and it excludes donors younger than 70½. It also expires in 16 months. We expect the planned giving community will continue promoting permanent and inclusive IRA rollover legislation. And with the current IRA rollover provision set to expire in little more than a year, we expect Congress will revisit this issue soon to consider what should happen with IRA rollovers in 2008 and beyond.