Individual Retirement Accounts (IRAs) and Donor- Advised Funds

Individual Retirement Accounts (IRAs) and Donor- Advised Funds

Last week, Congress passed and the President signed a $622 billion “tax extenders” bill. One of this year’s biggest surprises was Congress’ willingness to permanently enact a number of tax breaks that, in previous years, were annually sunset for budgetary reasons.

Several now-permanent provisions relate to charitable giving. Perhaps the one receiving the most attention allows for qualified charitable distributions directly from a taxpayer’s individual retirement account (IRA).

So What’s Changed?

Under the provision, taxpayers who are 70½ and older may direct a distribution directly from their IRA provided it is a “qualified charitable distribution.” Any qualified charitable distribution is excluded from a taxpayer’s taxable income. A qualified charitable distribution is any distribution(s) not exceeding, in aggregate, $100,000 during the tax year, and that are made directly from an IRA to a public charity. The public charity cannot be a supporting organization, and the distribution cannot be made to a public charity for the purpose of funding a donor-advised fund account.

Prior to this year’s tax bill, the IRA charitable distribution provision expired at the end of every year. Congress, however, would renew the provision but only at the very end of a year. The provision contained in the recent tax bill extends the rule to 2015 and all future years by making it permanent (or as “permanent” as any tax provision can be), thereby removing a continual source of anxiety for older donors with IRAs.

What It Means for Donors

By making the provision permanent, donors no longer need to rush during the final few days of the year (except, once again, during these waning days of 2015) to request a direct distribution from their IRA to charity. Instead, beginning January 1, 2016, they know such distributions will be excluded from their taxable income and have the entire year to decide how to direct such distributions, if any.

However, as mentioned above – and particularly relevant to DonorsTrust donors – IRA distributions meant to fund a donor-advised account are not considered qualified charitable distributions. (There is talk of changing the rule to include distributions to donor-advised fund accounts, but no such change is expected in the near future.)

The upshot is that even if you meet all the requirements to exclude a direct IRA distribution to charity from your taxable income, a direct IRA distribution to a donor-advised fund account is treated as a taxable withdrawal from your IRA under the provision. Most other 501(c)(3) public charities, such as those you support through your donor-advised fund, will qualify for a direct gift from your IRA.

A Final Word

Please keep in mind, though, that while a direct IRA distribution can’t be excluded from your taxable income if made to a donor-advised fund account, donor-advised fund accounts can, indeed, be the recipient of an IRA distribution. However, the IRA distribution would be included in your taxable income, and the resulting charitable gift from your IRA to your donor-advised fund account is eligible for the charitable tax deduction.

Before making any IRA distribution, please consult your tax advisor concerning how the distribution will affect you based upon your unique set of facts and circumstances.

About the Author

Jeff Zysik Jeff Zysik
Jeff is an attorney and accountant with fifteen years of tax planning experience, focusing primarily on sophisticated estate and income tax concepts. Before joining DonorsTrust, he was managing-director and co-founder of Charitable Entity Administration, LLC (CEA).

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