GRAND RAPIDS — An individual retirement account rollover provision in the Pension Protection Act of 2006 could boost charitable giving, because it permits older adults to make charitable transfers directly from their IRA without counting it as income and paying income tax on it.
The provision applies only to citizens aged 70½ or older, and the incentive is good now through Dec. 31, 2007. Those qualified can make direct charitable transfers of up to $100,000, or several transfers equaling that amount, from a traditional or Roth IRA. Unless Congress decides to extend the provision, the law is limited to all gifts made in 2006 through 2007. By going directly to charity, the money is not included in the IRA holder’s income and is not taxed, so the full amount is preserved for charitable purposes.
An estimated $3.6 trillion is currently invested in IRAs, noted Diana Sieger, president of the Grand Rapids Community Foundation.
“For larger estates, a sizable portion of IRA wealth goes to estate taxes and income taxes of beneficiaries,” Sieger explained. “Experts estimate heirs will receive less than 25 percent of most IRA assets that pass through estates.”
Marilyn Zack, the foundation’s vice president of development, said a donor simply directs his or her IRA trustee to make the contribution directly, and the donor must obtain a written acknowledgement of the contribution to take advantage of the tax-free treatment under the new provision.
Zack said a wide variety of nonprofits have the opportunity to benefit from the new legislation, including any 501c(3) organization such as the American Cancer Society, the American Heart Association, United Way, and smaller local organizations such as God’s Kitchen and D.A. Blodgett Homes.
“The one issue is that these kinds of transfers cannot be made to donor-advised funds,” Zack pointed out.
A donor-advised fund is a private fund that is administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family or individual. However, gifts to the kinds of funds typically held by community foundations — such as scholarship, field-of-interest and designated funds — do qualify under the provision, according to the Council on Foundations. Grand Rapids Community Foundation’s Fund for the Common Good, for example, would qualify.
“I would recommend that people talk to their accountant or financial adviser about this new law,” Zack said. “The key aspect of the new provision is that an individual has to direct his or her IRA trustee to make the contribution directly to the charity. It can’t go first to the donor and then to the charity; it has to go directly from the IRA administrator to the charitable organization.”
Zack said she thinks there has been a lot of information communicated about the new IRA provision.
“I know one sector that is trying very hard to communicate with all its constituents about the benefits of this new legislation is the nonprofit sector,” she said. “Certainly, the community foundation has provided a lot of information for all of our supporters about this new law, just as many, many other nonprofit organizations have. Information has been communicated to the professional IRA adviser audience, as well.”
People have called the foundation to inquire about the provision, and it has had a number of serious inquiries, Zack said, but so far no one has donated to Grand Rapids Community Foundation through a direct IRA transfer.
“We’re getting into year-end and that is typically when we start to see people wanting to take advantage of the benefits that are offered by this kind of arrangement,” she pointed out. “As we move closer to Dec. 31, I expect that’s when we would see some of these gifts coming to fruition.”
Sue Stoddard, vice president of finance for Heart of West Michigan United Way, said one donor who has given to the organization for many years has already taken advantage of the new provision to donate to the local United Way fund.
“They actually increased their donation over the prior year because of the provision, and that was a very nice surprise,” Stoddard said. “Hopefully, there will be a lot of activity, and I anticipate that the financial planners will be the ones talking to their clients about this as a way to avoid taxes, especially if their clients are giving to charity already. This is a neat way to do it.”
Bonnie Nawara, director of estate and asset services for the local chapter of the American Cancer Society, said she has spoken to quite a few people about the provision, and there seems to be a lot of interest in it.
“I’ve had three or four personal meetings with some of my past donors — those who support us on a regular basis,” she said. “When I present the plan to them, their eyebrows raise and they get nice smiles on their faces.”
Nawara said when people do their year-end planning and figure out where they are in terms of taxes, that’s when they tend to make decisions on charitable giving.
Grand Rapids Community Foundation’s Sieger underscored the fact that the provision is really a limited-time offer; the window will close in 2007 unless Congress extends it.
“For anyone interested in establishing a permanent legacy for the good of Kent County, this might be the opportunity of a lifetime to make the gift of a lifetime,” Sieger said.