Investor Education | Are you in line for a charitable rollover?

Some retirees may be able to benefit from a unique tax break. Thanks to a special tax law provision, an individual age 70 ½ or older can transfer a significant amount of funds directly from an IRA to a qualified charitable organization without paying any tax on the distribution. Such a "charitable rollover" also counts as a required minimum, distribution (RMD) for tax purposes.

This provision, which had expired and has been reinstated several times, was extended again by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). The PATH Act made it permanent.

Background: Previously, you could not directly transfer funds tax-free from an IRA to a charitable organization. Instead, you were required to pay tax on the distribution, regardless of your charitable intentions. This arrangement also worked against retirees who wanted to use IRA funds for charitable donations but no longer itemized their deductions.

However, beginning with the Pension Protection Act of 2006 (PPA) and subsequent legislation—including the PATH Act— individuals age 70 ½ or older can transfer IRA funds directly to a charity, up to an annual limit of $100,000 ($200,000 for a married couple). Although no tax deduction is allowed, donors are not taxed on the distribution either.

For these purposes, a qualified distribution is defined as one from either a traditional or Roth IRA that otherwise would be taxable. The distribution must be made directly from the IRA trustee to the charity.

Furthermore, the contribution must otherwise qualify as a charitable donation. If the deductible amount decreases because of a benefit received in return—for a dinner at a fundraising event, for example—or the deduction would not be allowed due to inadequate substantiation, the exclusion is not available for any part of the IRA distribution.

Under a special rule for charitable donations, the IRS treats distributions from an IRA funded at least partially with nondeductible contributions as coming first from taxable funds and then from nontaxable funds. For this calculation, all of the individual's IRAs are grouped together.

Note that the same rules also apply to Roth IRAs. Roth IRA distributions to individuals age 59 ½ or older are often tax-free. But a portion of a distribution may be taxable for a Roth IRA in existence less than five years. If you have both a traditional IRA and a Roth IRA, it generally makes sense to use the traditional IRA first for charitable distributions.

Caution: The charitable rollover technique is not for everyone. Obtain professional guidance as to how it might benefit your family's particular situation.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.

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