It?s the giving season and a law passed this year ? the Pension Protection Act of 2006 ? makes it easier forsome IRA-holding retirees to be a Santa?s helper without taking a tax hit.
“In the nutshell it?s a huge, sweeping legislation that is long overdue and that, for the most part, is very good for the public,” said Gary Williams, a certified financial planner with Williams Asset Management in Columbia, of the overall law. “It strengthens pension plans. It encourages people to save, and it increases the amount that people can save in a tax-beneficial way.”
However, of particular interest to seniors over 70 1/2 years of age ? when required minimum distributions (RMDs) must be taken from one?s IRAs ? is the law?s provision that allows up to $100,000 in distributions to be made to approved charities without the amount being added to one?s taxable income.
In other words, the donation can be used to offset the tax liability of the RMDs.
The contribution itself, however, is not tax-deductible; and it can be taken only by IRA/Roth retirees (employer-sponsored plans do not qualify) over 70 1/2 years of age.
In addition, it?s available only until the end of 2007 and the distribution must come directly from the IRA custodian/trustee to the eligible charity, with proper documentation attesting to the donation.
“This provision really wouldn?t relate to Roth IRAs,” Williams said, “because you don?t have required minimum distributions with Roth IRAs. With traditional IRAs you have to start taking money out by April 1 of the year after you?ve turned 70 1/2.”
To take advantage of this provision in the 2006 tax year, filers must make the donation ? maintaining the proper documentation and ensuring the recipient charity is IRS-qualified ? before year-end.
Vince Nesline, a tax accountant and president of Stoy, Malone and Co. in Towson, agreed that the provision really doesn?t apply to Roth IRAs ? whose distributions are tax-free ? but is variously significant for regular IRAs.
“This hundred thousand dollar pull-out, potentially, from an IRA,” Nesline said, “directed to the charity ? so credit goes toward the required distribution and an immediate offset is realized ? means I?m not bouncing up my income and I?m not losing itemized deductions. And I?m not causing more of my social security to be subject to tax. This provision, through the interplay of numerous calculations, can help taxpayers.”
