Legislation Enables Tax-Advantaged Charitable Contributions from IRAs Once Again

The "Emergency Economic Stabilization Act of 2008" became law on October 3, 2008. Of potential interest to qualifying ARI donors is one of the charitable giving incentives (extended from the "Pension Protection Act of 2006," which expired at the end of 2007) included in the bill: For individuals who have reached the age of 70.5 and who have Individual Retirement Accounts, tax-free distributions to non-profit organizations are possible for a limited time.

Previously, distributions from IRAs for charitable gifts were fully taxable at the federal level (except for Roth IRAs and IRAs funded with nondeductible contributions). And since there is no tax deduction involved—the distribution is simply excluded from gross income—even those who do not itemize deductions may participate. Can you take advantage of the legislation, even in light of the 2009 waiver on mandatory distributions (see #3 below)? To find out, continue reading . . .

1. I'm interested. What else do I need to know?

The key points of the legislation are as follows:

• You must be at least 70.5 years old.

• Gifts must be from your IRA (not from other types of retirement plans).

• Tax-free charitable gifts from IRAs must be completed no later than December 31, 2009.

• Total charitable distributions from your IRA may not exceed $100,000 per year; other than this limit, distributions may be in any amount.

• Distributions must be made directly from the IRA custodian to ARI.

• Distributions must be outright charitable gifts (vs. contributions to fund gift annuities and other planned giving arrangements, which do not qualify).

• Public charities qualify to receive IRA gifts, but private foundations, donor-advised funds, and support organizations do not. For example, the Ayn Rand Institute qualifies, but the Anthem Foundation for Objectivist Scholarship does not.

2. The value of my IRA has dropped alarmingly due to the current financial crisis; reducing it further by a transfer to ARI is not possible at present because I depend on these funds for my livelihood now and in the future. I know I am not alone in this regard. Why are you promoting this legislation?

We empathize. To read our commentators' views on the financial crisis, see ARC's Response to the Financial Crisis.

We are not promoting the legislation as such; in a free economy, the government would have no involvement in citizens' retirement plans. Rather, we are helping to make our donors aware of a tax-saving opportunity, so that they may make better-informed decisions about their ARI support. As you will see if you continue reading, there may still be good reasons for donors to make distributions of IRA funds to ARI while they can do so without having to pay tax on such distributions.

3. Who is most likely to be motivated to make a charitable gift from an IRA?

Generally speaking, individuals 70.5 and older who are required to take IRA distributions, but who do not need or want the taxable income from that source, may find the IRA gift opportunity attractive—especially if they do not itemize deductions. However, as part of the "Worker, Retiree, and Employer Recovery Act of 2008," Congress has waived mandatory distributions for 2009. Thus donors whose motivation has been to avoid the taxable income generated by their Required Minimum Distribution (by having that amount sent to ARI) may want to use other assets for their ARI support in 2009.

Other circumstances that could motivate an IRA gift are covered in additional questions and answers below.

4. I do not itemize deductions on my tax return. If I transfer funds from my IRA to ARI, how do I achieve the tax savings?

There is no charitable deduction for an IRA charitable transfer. Rather, the amount transferred is simply not considered when you calculate your taxable income. Previously, any distribution from your IRA was fully taxable; now, assuming you meet the age threshold and other requirements listed above, a distribution to charity is tax-free whether you itemize or not. This can be a significant advantage for non-itemizers who want to support ARI and reduce their taxable income.

5. Why is there no charitable deduction for a transfer to ARI from my IRA?

Like a number of other retirement plans, IRAs are tax-deferred under federal law. You lowered your taxable income back when you made pre-tax contributions to your IRA; now, when you take distributions from your IRA, that income is taxable at your ordinary income rate. If both a tax-free transfer to charity and a charitable deduction were allowed, that would constitute a double tax "benefit" in the eyes of Congress.

6. Distributions from my Roth IRA are already tax-free. What’s the tax advantage to me of making a transfer to ARI from my Roth IRA?

There probably is no advantage. There would be a charitable deduction in the case of a charitable transfer from a Roth IRA—but since the principal and growth in a Roth IRA are permanently tax-free, Roth IRA owners may find that it is more tax-efficient to contribute other assets to ARI. Essentially, a gift from a Roth IRA is the same as a gift of cash.

7. I do not have an IRA, but I have a 401(k) plan. Could I investigate rolling the 401(k) over to an IRA in order to take advantage of the new legislation?

Yes. Other possibilities for rolling over to an IRA include 403(b), TIAA-CREF, and Keogh plans. Keep in mind, however, that there may be reasons to stay in your current plan (e.g., surrender charges, ERISA protection). Consult your financial advisor before taking this step in order to arrange an IRA gift to ARI.

8. I have already taken a distribution from my IRA in 2009. Is it too late to send that money to ARI tax-free instead?

Yes, it is too late. The transfer must have been made directly from your IRA custodian to ARI, not via a withdrawal by you.

9. If my spouse has an IRA and has reached age 70.5, can both of us transfer up to $100,000 to ARI from our IRAs?

Yes. The $100,000 annual limit applies to each IRA holder, not to each household. If both you and your spouse were to take full advantage of tax-free IRA gifts to support the Institute, you could give $200,000 per year.

10. Aren’t there IRS limits on how much of my income I can donate each year?

Yes, but they do not apply to charitable transfers from IRAs.

Depending on the type of asset you contribute to ARI, you may claim a charitable deduction for up to 50% or 30% of your adjusted gross income (AGI). If you contribute more than the deduction ceiling, you may "carry forward" the unused deduction for up to five additional years.

But since there is no deduction for IRA charitable transfers, the question of deduction ceilings does not even arise. In effect, the legislation allows more charitable giving—up to $100,000 more—regardless of AGI.

11. Why would I want to reduce the size of my IRA by making a transfer to ARI?

If you depend on distributions from your IRA for your livelihood, this opportunity is probably not the best option for you. But if you have sufficient income from other sources, reducing the size of your IRA—thereby reducing your future taxable income—can be a good financial strategy. Some donors deliberately seek to lower their tax bracket via their support of ARI.

Above certain income levels, some donors also face deduction phase-outs (due to statutory limitations on charitable contributions and other deductions) that reduce the tax efficiency of their ARI support. IRA gifts can help solve this problem as well.

12. How exactly is age 70.5 defined?

You reach age 70.5 six months after your 70th birthday, on the same day as your birthday. For example, if your 70th birthday was May 1, 2009, you will turn 70.5 on November 1, 2009. For purposes of the legislation, if your 70th birthday occurred before July 1, 2009, you qualify. However, if your 70th birthday was in late June 2009, it may be difficult to complete a tax-free IRA gift to ARI—since you will not turn 70.5 until late December 2009, and IRA gifts can take extra time to complete via your IRA custodian.

13. The state where I live imposes a state income tax. Will my IRA gift be tax-free for state tax purposes as well as for federal?

That depends on the state. Consult your tax advisor regarding the state tax consequences of an IRA gift to the Institute.

14. Can an IRA gift to ARI help with estate taxes?

Yes. At your death, your remaining IRA assets will be included in your taxable estate. If your estate is subject to estate tax, reducing the size of your IRA could make a difference. The smaller your estate, the smaller the estate tax bill to your heirs.

In addition, at your death your IRA funds will be subject to income tax as well, further reducing the size of your heirs’ inheritance. Regardless of whether you make a lifetime IRA gift to ARI or not, naming the Institute as the death beneficiary will eliminate liability for both estate tax and income tax on your IRA.

15. I have already named the Institute as the death beneficiary of my IRA, and my taxes are already low. Why donate from my IRA now, since ARI will get it anyway after I die?

To provide more funds sooner in support of ARI’s race with time to change the culture before it deteriorates further—and to see your dollars in action during your lifetime.

16. If I conclude that I want to take advantage of the legislation, how do I go about executing a transfer from my IRA to ARI?

To effect the transfer, you will need to send a letter of instruction to your IRA custodian. You are welcome to use this sample text in preparing your letter. Alternatively, at your request ARI's Kathy Cross will prepare the letter for you; contact her at 732-242-9408 or kcross@aynrand.org.

17. I have concluded that an IRA gift to the Institute is not compatible with my financial goals. In what other ways can I support ARI?

You may contribute cash via check, credit card, or PayPal. Join our Electronic Funds Transfer program and make automatic contributions to ARI every month. Also, consider gifts of non-cash assets to obtain additional tax savings; read more about ways to contribute.

To support the Institute after your lifetime and participate in the Atlantis Legacy, name ARI as a beneficiary (primary or contingent) of your IRA or other retirement account, insurance policy, etc., and/or in your will—and consider other planned giving arrangements that offer supplementary income and tax advantages during your lifetime. To explore planned giving options, browse our Atlantis Legacy pages.

For more information about tax-free IRA gifts, contact Gift & Estate Planning Manager Kathy Cross at 732-242-9408 or kcross@aynrand.org.

Atlantis Legacy Pages

• Atlantis Legacy Welcome
• About the Atlantis Legacy Program
• From the Executive Director
• Bequests to ARI
• Planned Giving Beyond Bequests
• Estate Planning
• Events and Other Donor Benefits
• Atlantis Legacy Donors In Their Own Words
• Current List of Atlantis Legacy Donors
• To Participate in the Atlantis Legacy
• Contact Us

ARI is committed to providing donors with accurate and authoritative information about planned giving. However, we cannot render legal or tax advisory services, and the information in these Web pages is not intended to serve as legal or tax advice. We urge donors to consult their own advisors regarding the tax and legal consequences of potential gifts. We are pleased to work with donors’ advisors as well as our own to ensure the best result for all concerned.

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