This year, IRA owners who are 70 ½ or older can save on taxes and fund their favorite charities at the same time. The temporary provision, which expires at the end of the year unless Congress acts, is a welcome relief to many retirees who don’t need the money, but are required to take annual minimum distributions by December 31 and pay taxes on their withdrawal. If they miss the deadline, they face one of the toughest penalties in Uncle Sam’s arsenal -- 50% of the amount they failed to withdraw.

Now you can donate up to $100,000 directly from your IRA to one or more charities and use it to satisfy your required minimum distribution. But you can’t use your tax-free IRA distribution to fund a donor-advised fund, a charitable remainder trust or a charitable gift annuity.

Although you can't double dip and claim a charitable deduction, the tax break may be even more valuable because you won't have to include your IRA distributions in your adjusted gross income. As a result, you could benefit from other tax breaks, such as reducing taxes on your Social Security benefits or boosting your deductible medical expenses, both tied to your adjusted gross income.

Who’s affected? The law requires you to begin withdrawals once you reach age 70½, but the first withdrawal can be postponed to as late as April 1 of the following year. So if your 70th birthday was between January 1 and June 30 of this year, you turned 70½ in 2007. That means you can put off your first mandatory withdrawal until April 1, 2008, but if you do, you’ll have to take a second distribution by December 31, 2008 and annually thereafter.

The penalty we're talking about threatens folks who turned 70½ in 2006 or earlier. They are required to withdraw a certain amount -- based on the balance of the account at the end of the previous year and on their life expectancy. The required minimum must be paid out by December 31. Mandatory withdrawal rules do not apply to Roth IRAs (unless you inherited the account).

Failing to take the required distribution unleashes that stiff 50% penalty. If you are not certain that you have taken yours for 2007, call your IRA sponsor. If you must make a withdrawal, you can arrange to have income taxes withheld from the distribution to cover the tax bill you'll owe. You'll pay tax at your regular income tax rate, not the preferential capital gains rate that applies to other investments.

Return to: 15 Year-End Tax Moves

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