Follow-Up on Indirect IRA Rollovers

Follow-Up on Indirect IRA Rollovers

Article posted in Retirement Plans on 4 October 2005| 2 comments
audience: National Publication | last updated: 18 May 2011


Last week 1,300 gift planners convened in Orlando for the 18th National Conference on Planned Giving. And as suspected, the Katrina Emergency Tax Relief Act of 2005 and its implications on "indirect" IRA rollovers was a hot topic. In this follow-up to last week's article, Professor Christopher R. Hoyt, who presented at the conference on this subject, offers his further thoughts and computations.

Editor's Note: For background, see last week's article: The Katrina Relief Bill and "Indirect" IRA Rollovers

by Christopher R. Hoyt

There are several additional points to make based on comments and questions I've received over the past few days pertaining to indirect IRA rollovers:

Net Tax Cost of Giving from Retirement Accounts

The computations indicate the federal income tax cost to the donor for taking money out of a retirement account and giving it to charity is about 1% or 2%. The first point is that if the donor is subject to other tax deductions that will phase-out as income increases, such as medical expenses (7.5%), miscellaneous itemized deductions (2%), and casualty losses (10%), the cost of taking money out of an IRA to make a charitable gift will, of course, be even higher.

Download: Katrina Tax Computations [PDF]

Download: Adobe Acrobat Reader

Effect on AMT

Second, many people inquired about the impact of charitable gifts from IRAs on the alternative minimum tax ("AMT"). These attached computations indicated that gifts from retirement accounts did not incur an AMT problem. In other words, taking money out of a retirement account and giving it to charity neither generated the AMT for people paying the regular income tax, nor did it eliminate the AMT for people who were already subject to it. The over-simplified answer is that NORMALLY if a person is not subject to the AMT, this behavior will not trigger it. For a person already subject to the AMT, they will still be subject to it. For people subject to the AMT, any increased tax liability will just be at the 28% AMT rate rather than the ostensibly higher rate that they would normally be subject to.

Transfers in Exchange for Gift Annuities

Third, many people inquired whether contributions of cash for charitable gift annuities qualified for waiver from the 50% limitation. I can't say for sure whether it is a contribution "to" the charity for purposes of this statute. What I can say for sure is that it is a financial disaster to take EXTRA money out of your retirement account for the purpose of acquiring a charitable gift annuity. The income tax consequences are awful. The donor may have $100,000 of taxable income from a $100,000 IRA withdrawal, but he or she will only get a partial offsetting charitable deduction of 40% or 50% by paying $100,000 to acquire a charitable gift annuity (i.e., $40,000 or $50,000). It makes no logical sense. Better to leave the money in the IRA and name the charity as the beneficiary of the IRA at death.

By comparison, if you take the minimum required by law because you are over age 70 1/2, then a gift annuity will provide a little bit of a charitable deduction on a federal income tax return to offset the income that you cannot avoid taking out.

Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, you are informed that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party to any transaction or matter addressed herein.

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RE: Appreciated Stock

Could you please illustrate an example of a donor cashing in stock, paying the long term gains and gifting the cash.

Selling Stock

That's a great question and it has spawned many more. Stay tuned for an article that will address this issue.

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