Strategies for IRA Distributions to Family and Charity – Part I

Introduction
According to data collected by the Investment Company Institute, Americans held $7.9 trillion in IRAs by the end of 2016, making IRAs the largest pool of individually held retirement-type assets in the U.S. This is up significantly from the $3.7 trillion of IRA assets held in 2008. With this growth, estates are increasingly comprised largely of IRAs and other retirement plans. Especially for professionals, business owners and employees, 30% to 80% of an estate could consist of IRAs or other retirement plans. As such, more and more IRA owners are seeking help and guidance from advisors in determining how to distribute IRA assets to family and charitable organizations while minimizing tax consequences.This article will explain the basic rules surrounding IRAs and the tax implications for distributions to the IRA owner, to family and to charity. It will shed light on the IRA charitable rollover, discuss the primary options available when leaving an IRA to a spouse or child and provide charitable IRA solutions for philanthropic IRA owners. By understanding the options that are available, advisors can be better equipped to provide clients with options and tools that will ultimately accomplish the personal goals of the client and distribute assets in a tax-efficient manner.

IRA BASICS AND THE IRA CHARITABLE ROLLOVER
As are attractive to taxpayers because they provide major benefits to the IRA owner during life. First, contributions to traditional IRAs are made on a pre-tax basis. Second, the funds held within the account grow tax free. However, distributions from IRAs are taxable at ordinary income rates. Once a traditional IRA owner reaches age 70½, he or she must begin taking a required minimum distribution (RMD) each year. The RMD is based on the life expectancy of the IRA owner and the account balance. As the IRA owner gets older, the percentage of the IRA that must be distributed increases. The RMD amount will increase the donor’s adjusted gross income (AGI) and is taxed at ordinary income rates.To avoid paying tax on the RMD and being pushed into a higher tax bracket, many IRA owners choose to take advantage of the IRA charitable rollover. The IRA charitable rollover, which was made permanent in 2015 with the passage of the Protecting Americans from Tax Hikes (PATH) Act, enables IRA owners over the age of 70½ to make direct transfers from their IRAs to public charities without being taxed on the distribution and without recognizing the distribution as income for tax purposes. Sec. 408(d).

This qualified charitable distribution (QCD) is allowed up to a total of $100,000 per year and may satisfy part, or all, of the owner’s RMD. Note that, because the transfer is not included in taxable income, there is no charitable income tax deduction. However, it still carries the same economic impact and, thus, is a great option for those choosing not to itemize their taxes this year. By making a charitable rollover gift, a non-itemizer is essentially receiving the same benefits as a charitable deduction since the distribution will be excluded for tax purposes. Example 1:

Susan is a faithful supporter of her favorite charity. She has a $200,000 IRA and her RMD this year is 5%, or $10,000. Because she has substantial other income and does not itemize her deductions, Susan directs her IRA custodian to make a qualified charitable distribution to her favorite charity in the amount of $10,000. Because the full RMD is transferred to a qualified charity, Susan will owe no taxes on her RMD and will not be required to include it in her income for tax purposes. Because Susan takes the standard deduction, the IRA rollover reduces her taxable income by $10,000. Based on her income tax rate of 32%, the IRA charitable rollover will save Susan $3,200 of income tax. After seeing the benefits of this tax-saving and charitable strategy, Susan plans to continue making IRA rollover gifts for the rest of her life.If you would like to support a favorite Catholic church, school, or ministry through an IRA contact Scott Hartman (614-443-8893 or shartman@catholic-foundation.org) for additional details.

Disclaimer: We’re not accountants, this does not constitute tax advice. Please consult a tax professional.