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Making Charitable Contributions From an IRA

You have less of an incentive to take advantage of this special rule in 2009.

By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance

October 2, 2009

Editor's note: Congress has not yet restored the tax break for IRA payouts to charity for 2010. See Tax Breaks for Donating IRA Payouts to Charity in 2010.

Can I make charitable contributions from my IRA in 2010? The law that allows it has been in effect for the past few years.

That law is still in effect, although you have less of an incentive to give IRA money to a charity in 2009 than you had in the past.

A temporary tax-law change permits IRA owners who are 70½ or older to make a tax-free distribution of up to $100,000 for the year from their traditional IRAs to a charity. This special rule, which first took effect in 2006, has been particularly helpful in the past for retirees who were required to take minimum distributions from traditional IRAs that had increased significantly in value through the years -- and would owe a big income-tax bill on their withdrawals -- but didn’t need the money to live on. If you take advantage of this rule, you can’t double dip on tax benefits by also claiming a charitable deduction, but you avoid having to include the IRA distribution in your adjusted gross income.

Even though the special rule was extended through 2009, this strategy became a little less attractive when required minimum IRA distributions were suspended this year. You can withdraw money from your IRAs this year if you need it, but you aren’t required to take minimum distributions in 2009 -- even if you’re older than 70½. You can keep the money in your account, where it can continue to grow tax-deferred. See Wise Moves for a Year With No RMDs for more information.

But you may want to consider donating funds from your IRA this year anyway if you want to support a charity and get money out of your IRA to help reduce required minimum distributions in the future, says Rob Seltzer, a CPA and personal financial specialist in Beverly Hills, Cal. Currently, the rule that allows tax-free charitable IRA distributions is scheduled to expire at the end of 2009, and required minimum distributions are scheduled to resume in 2010.

Giving away IRA money can also help with estate planning, says Seltzer, because it’s usually more advantageous tax-wise to inherit appreciated stock than IRA money. “If someone inherits an IRA, there are required distributions and they are taxed at ordinary income-tax rates,” he says. “But if someone inherits appreciated stock, they get a step-up in basis and avoid paying income taxes. So given the alternative, it is almost always better to use IRA assets for charitable contributions for a high-net-worth person with a sizable IRA.”

If you do want to give IRA money to a charity, you need to follow special rules so you don’t jeopardize the tax break. The money needs to go directly to the charity, but the IRA administrator can either make a direct transfer or can send you a check that you can deliver to the charity, says Ken Hevert, vice-president of retirement products for Fidelity Investments. Even if the check goes to your home, it must be made out to the charity instead of to you.

First, contact the charity and ask how it would like to receive the money. Then call your IRA administrator and ask what steps you’d need to take to make the contribution. Fidelity, for example, requires the request to be made in writing; you can get the forms online or request them from a customer service representative. You have until December 31 to make the tax-free contribution, but it’s better to submit the paperwork by mid December at the latest to make sure the transaction goes smoothly.

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