New Pension Law Also Provides for Charity
Provision allows for tax-free charitable transfers from
Since 1974, millions of Americans have saved billions of pretax 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, according to the Board of Governors of the
Federal Reserve System. Recently, 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 philanthropy. "This is a wonderful win-win
situation for people who would rather give to charity than pay taxes and the
nonprofit organizations they choose to support," said Susan Springgate, VP,
Finance & Administration for the Kalamazoo Community Foundation in Kalamazoo, Mich.
Because of decades of deliberate saving and favorable investment returns, a
substantial share of todays retirees has 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,"
Springgate said. "Experts estimate heirs will receive less than 25 percent of
most IRA assets that pass through estates."
A provision in the new federal Pension Protection Act of 2006, signed by
President Bush, 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 made this year and next.
In 2006 and 2007, holders of traditional and Roth IRAs who are at least 70 1/2
years old can make direct charitable transfers up to $100,000 per year. As
qualified public charities, community foundations can help donors execute the
transfers and choose from several charitable fund options for their gift. 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," reminds Brenda Hunt, President and CEO of
the Battle Creek Community Foundation. "For anyone interested in establishing a
permanent legacy, this is the opportunity of a lifetime to make the gift of a
Gift of a Lifetime: Shopping for Charity
Having more retirement money than you need is a great problem to have, and one
that's now easier to solve. But generous IRA donors still face multiple options
for their gift: Support the entire community? Underwrite a special cause? Shore
up a favorite charity? Here are three top community foundation fund picks of
Springgate and Hansen.
Field of Interest Fund: Connecting personal values to high-impact
opportunities. IRA transfers to Field of Interest Funds allow donors to target
gifts to causes important to them: arts, AIDS services, urban education,
neighborhood revitalization, youth welfare and more. The community foundation
awards grants to community organizations and programs addressing the donor's
specific interest area.
Hunt: "For those who are particularly passionate about a single cause, Field
of Interest Funds provide strategic, lasting support even as needs change over
Designated Fund: Helping local organizations sustain and grow. IRA transfers to
a designated fund allowing donors to support the good work of a specific
nonprofit organization a senior center, museum or any qualifying nonprofit
Springgate: "For people who want to help secure the future of their favorite
charities, our endowed Designated Funds give nonprofits a steady stream of
income, plus planned giving and investment management services."
Unrestricted Funds: Meeting ever-changing community needs. IRA transfers to the
community foundation address a broad range of current and future needs.
Professional program staff evaluates all aspects of community well-being arts
and culture, community development, education, environment, health and human
services and awards strategic grants to select projects and programs.
Hunt: "For people who care deeply about this community and its people, this fund
is an excellent way to address our most pressing needs, today and tomorrow."
To learn more about charitable IRA opportunities and if they are right
for you, download these tools:
Locate your local community foundation.