September 15, 2006

New Pension Law also Provides for Charity – Direct IRA Transfers for U.S. Community Foundations

Provision Allows for Tax-free Charitable Transfers from IRA's

Since 1974, millions of Americans have saved billions of pre-tax dollars in Individual Retirement Accounts (IRAs). Thanks to continued savings and investment returns, an estimated $3.6 trillion is currently invested in IRAs, and the total continues to grow. Last month, a federal law was enacted allowing IRA owners to share the wealth of their retirement savings by giving directly to charity -without first counting it as income and paying income tax.

The new law could be a boon to local as well as national philanthropy.

"This is a wonderful win-win—for people who would rather give to charity than pay taxes - and to the nonprofit organizations they choose to support," said Kerry Conway, Greene County Foundation executive director. Thanks to decades of deliberate saving and favorable investment returns, a substantial share of today's retirees have more money in their IRAs than they'll ever need. Many have expressed an interest in giving the funds to charity, but income tax must be paid on all withdrawals, which sharply reduces the value of the gift. Others have asked about designating their children as beneficiaries, but that may draw additional tax consequences. "For larger estates, a good portion of IRA wealth goes to estate taxes and income taxes of beneficiaries," Conway says. "Experts estimate heirs will receive less than 25% of most IRA assets that pass through estates."

A provision in the new federal Pension Protection Act of 2006, signed by President Bush on August 17, creates a new option: transferring IRA assets directly to charity. By going directly to charity, the money is not included in the IRA owner's income and—most importantly—is not taxed, preserving the full amount for charitable purposes. The law covers all gifts up to $100,000 made this year and next.

Up until now, wealthy clients who wanted to donate IRA funds may have shied away because they were not able to completely deduct the gift for federal income-tax purposes - due to the 50 percent of adjusted gross income (AGI) limit. Take for example, Richard Rich, a hypothetical 71-year-old donor. He has an adjusted gross income (AGI) of $85,000, but prior to this new legislation, upon withdrawing $100,000 from his IRA, Rich's new AGI would be $185,000. If he gave the $100,000 to charity, his deduction would be limited to 50 percent of his AGI, or $92,500. He would then owe tax on $7,250 worth of the income he gave to charity. Under this new law, the $100,000 is not reported as part of Rich's AGI. And, therefore, it does not need to be deducted on his tax return.

In 2006 and 2007, holders of traditional and Roth IRAs who are at least 70½ years old can make direct charitable transfers up to $100,000 per year. As a qualified, public, not-for-profit organization that inspires people to make charitable gifts that improve the quality of life in Greene County, the Greene County Foundation can help donors execute the transfers and choose from several charitable fund options for their gift. (Note: Donor Advised Funds do not qualify for tax-free IRA transfers.)

"This really is a limited-time offer: the window is open now, but it will close in 2007 unless Congress extends it," said Conway. "For anyone interested in establishing a permanent legacy in this community, this is the opportunity of a lifetime to make the gift of a lifetime."

Through philanthropic services, strategic investments and community leadership, Greene County Foundation helps people support the causes they care about, now and for generations to come, visit us at www.greenecountyfoundation.org.