Charitable Gifts From IRAs and the RMD

Will Congress extend the law permitting people over age 70 1/2 to make tax-free transfers from an IRA to charity for 2012? I've been waiting to take my required minimum distribution because I'd like to give it to charity and avoid paying taxes on the money. But I'm worried that if I wait too long, I'll miss the December 31 deadline for taking my RMD, and I don't want to pay a penalty. What should I do?

The law, which allows tax-free transfers of up to $100,000 from an IRA to charity -- has not yet been extended for 2012, but it still could be approved. Congress typically waits until late December to take action on this law, leaving people scrambling to make the transfer in time to satisfy their annual IRA minimum-distribution requirements.

You can wait a bit longer, but don't wait too long. Even though you technically have until December 31 to take your required minimum distribution, it can take a while to complete the transaction. Fidelity, for example, advises customers to take their RMD by December 15, especially if they have any special requests, such as asking to send the money to a charity or other third party. (Fidelity requires that such requests be made in writing, with a signature guaranty.) And many financial services providers experience some of their highest call volumes during the last two weeks of the year. If you need to sell stocks or mutual funds so you can donate cash, you may want to do it soon so you’re ready to transfer it quickly; trade settlements can take up to three business days.

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Another option is to ask your IRA administrator if you can transfer the money directly to the charity now and have the transfer count toward your RMD, no matter what happens to the law. That way, you make the RMD deadline and the transfer will be tax-free if the law is extended. If the law isn't extended, your 1099 will report the transfer as a taxable distribution, but it will still count for your RMD, and if you itemize deductions, you’ll be able to write off the money as a charitable contribution. Note that under this scenario the distribution will be added to your adjusted gross income, which could affect some other areas of your finances – if, for example, the distribution makes you subject to the high-income surcharge for Medicare Part B and Part D premiums (see Medicare Part B Premiums to Rise in 2013) or takes you over the income limit to be eligible for certain tax breaks.

It's important to transfer the money directly -- if you withdraw the funds from your IRA and then write a check to the charity, it won’t count as a tax-free transfer and will be added to your adjusted gross income, even if the law is extended. Contact the charity now to find out its procedures. The American Cancer Society, for example, provides a sample letter that people can send to their IRA administrators to initiate the rollover. Also give the charity a heads-up that the money will be coming.

No matter what happens, be sure to make the required minimum distribution by the December 31 deadline. Otherwise, you could have to pay a steep penalty: 50% of the money you should have withdrawn. (If Congress passes the extension very close to New Year's Eve, it may offer a break on the penalty, but you can't count on that.) Waiting past December 31 will also make it too late to write a check to the charity and have it count for a 2012 deduction. For more information about RMDs, see Rules for Required IRA Distributions.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.