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Many Americans have long been looking for ways to donate their retirement assets to charities on a tax-free basis, while they are alive. However, until the Pension Protection Act of 2006 (PPA) was signed into law on August 17, 2006, it was impossible to do so without the donation being treated as a regular distribution and ordinary income. PPA included a provision that allowed eligible individuals to make non-taxable distributions from certain types of retirement plans to eligible charities. These distributions, for which the proper reference is qualified charitable distribution (QCD), are limited to $100,000 per year and apply only to 2006 and 2007 distributions, unless the provision is extended.

Even with the provisions of PPA, this option for donating retirement assets to charity is still limited, not only to the type of retirement assets that can be gifted, but also to the individuals who are eligible and the type of charity to which the donation can be made.

Eligibility for QCD

Individuals who want to gift their retirement assets to a charity under this provision must ask themselves four questions:

1. Am I old enough?
2. Does my retirement account qualify?
3. Does the charity qualify? and
4. Is it too late to make a QCD?

The answer to these questions will determine eligibility to donate the retirement assets to the charity on a tax-free basis.
 

• Am I Old Enough: Under the provisions of PPA, QCDs are available to IRA owners and beneficiaries who are at least age 70 ½ when the distribution occurs from the IRA, and permits the IRA owner to treat the QCD as required minimum distributions (RMD) from the IRA for the year- to the extent that the RMD has not already been satisfied. For instance, if the IRA owner’s RMD for the year is $20,000, and $50,000 is withdrawn as a QCD, $20,000 of the $50,000 is treated as the RMD for the year, even though it is not received by the IRA owner. As a result, the IRA owner need not withdraw additional amounts to satisfy his/her RMD for the year.
• Does my retirement account qualify:QCDs may be made from traditional IRAs and Roth IRAs. They can also be made from SEP IRAs and SIMPLE IRAs, providing no employer contributions are made to the account for the plan-year that ends with or within the taxable year that the QCD is made.  This is a pretty simple rule for plans that are maintained on a calendar year basis, but less so for plans maintained on a fiscal year. Here’s how this provision works for a taxpayer whose taxable year is a calendar year:
• Calendar Year Plans: If a SEP or SIMPLE contribution is made to the plan for the 2007 calendar year, QCDs cannot be made from the SEP/SIMPLE account for 2007.
• Fiscal Year Plans: If the SEP is maintained on a fiscal year- for instance July to June, and a contribution is made for the 2006 plan year that ends in June 2007, a QCD cannot be made from the SEP for 2007.  As SIMPLEs cannot be maintained on a fiscal year, this fiscal year nuance is not an issue for QCDs from SIMPLE IRAs.
• Does the Charity Qualify: QCDs can only be made to charitable organizations described in Code § 170(b)(1)(A). This includes churches, conventions or association of churches and certain  educational organizations. It does not include donor advisor funds, private foundations and charitable gift annuities.

• Is it too late? PPA made QCDs available only for 2006 and 2007. Therefore, unless the provision is extended, IRA owners who want to take advantage of this provision must ensure that the distribution is processed from the IRA by December 31, 2007.  The good news is that legislation has been introduced to extend this provision. Under the Public Good IRA Rollover Act of 2007 , the QCD provision would not only be made permanent, but would also extend the provision to allow owners of Roth and Traditional IRAs who are at least age 59 ½ to make QCDs to eligible charities. 

Other QCD Rules

• Dollar Limit:The QCD amount is limited to $100,000 per year. For married couples who file a joint return, the amount is increased to $200,000, providing each individual qualifies separately for the QCD and no more than $100,000 is taken from each spouse’s IRA.
• Deduction: While QCDs are not deductible, they qualify to be QCDs only if the donation would have otherwise been deductible as a charitable contribution. 
• Payee Requirement: Amounts representing QCDs must be made payable to the charity, and can either be delivered directly to the charity, or delivered to the IRA owner for further delivery to the charity.
• Tax Reporting: IRA custodians are not responsible for determining whether a charity satisfies the requirements for a QCD, and the IRS’s instructions for reporting QCDs provide that the IRA custodian report them as regular distributions. Therefore, the onus is on the IRA owner to report the amount so that it is excluded from income. According to the IRS instructions for filing IRS Form 1040, the IRA owner must input the distribution amount on line 15a. If the entire distribution amount is a QCD, then -0- is inputted on line 15b. If only a portion of the distribution is a QCD, then the difference (the amount that is not a QCD), is inputted on line 15b. The IRA owner should also enter ‘QCD’ within the space beside line 15b.

Not Eligible for QCDs?

Individuals who are ineligible for QCDs and still want to donate their retirement assets to a charity has two options:

1. Take a regular distribution and include it as ordinary income and donate the amount to the charity. If eligible, the individual may claim a deduction for the donation on his/her tax return
2. Make provisions to have the amount donated after death. This can be accomplished by designating the charity as the beneficiary of the retirement account.  For taxable retirement assets, this is usually a more favorable option than donating other assets which have already been taxed, as it reduces the taxable portion of assets that would be inherited by the IRA owner’s other beneficiaries. For instance, assume  the IRA owner’s assets comprises of a traditional IRA and a savings account with after tax assets, each valued at $100,000, The IRA owner wants to leave $100,000 to a charity and $100,000 to his daughter. To prevent his daughter from paying taxes on the amount she inherits, he leaves the after-tax savings to her. As the charity is a tax-exempt organization, it will not pay taxes on the IRA balance, even though it’s pre-tax assets. It is important to note that if the IRA is a Roth IRA, then it may be more beneficial to designate his daughter as the beneficiary of the Roth IRA, as amounts in the Roth IRA have the opportunity to grow on a tax-free basis. Also, even for traditional IRAs, a projection should be done to determine whether the stretch IRA benefits would produce a better end –result for his daughter, than the after-tax amount in the savings-account.

Conclusion

The timing of a donation of retirement assets to a charity will determine the tax impact of the donation on the IRA owner and/or the beneficiaries.  For some IRA owners, this would be a non-issue as they have no objection to paying taxes on the amounts they donate. For others, who want to make the donation and either can’t afford or would prefer not to pay taxes on the donation, timing is critical. These individuals must ask themselves the four questions posed earlier in this article and determine whether it would be more tax-savvy to designate the charity as a beneficiary of the retirement account, instead of donating the amount during the IRA owner’s lifetime.