New Pension Law Also Provides for Charity Provision
Allows for Tax-free Charitable Transfers from IRAs
Fitchburg, MA (August 21, 2006) – Since 1974, millions of Americans have saved billions of pre-tax 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. Last Thursday, 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—for people who would rather give to charity than pay taxes—and the nonprofit organizations they choose to support,” said Phil Grzewinski, president of the Community Foundation of North Central Massachusetts. Thanks to decades of deliberate saving and favorable investment returns, a substantial share of today’s retirees have 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,” Grzewinski said. “Experts estimate heirs will receive less than 25% of most IRA assets that pass through estates.”
A provision in the new federal Pension Protection Act of 2006, signed by President Bush last week, 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.
New Pension Law Also Provides for Charity
In 2006 and 2007, holders of traditional and Roth IRAs who are at least 70 ½ years old can make direct charitable transfers up to $100,000 per year. As a qualified public charity, Community Foundation of North Central Massachusetts can help donors execute the transfers and choose from several charitable fund options for their gift. Donor Advised Funds do not qualify for tax-free IRA transfers.
“This really is a limited-time offer: the window is open now, but it will close in 2007 unless Congress extends it,” said Grzewinski. “For anyone interested in establishing a permanent legacy in this community, this is the opportunity of a lifetime to make the gift of a lifetime.”
Sources:
IRA MARKET SHARES BY HOLDER, 2001-2005
($ billions, end of year)
| By holder | 2001 | 2002 | 2003 | 2004 | 2005 |
|---|---|---|---|---|---|
| Commercial banking | $160.1 | $165.6 | $166.0 | $168.0 | $170.5 |
| Saving institutions | 54.6 | 53.8 | 55.1 | 53.7 | 53.8 |
| Credit unions | 39.9 | 43.3 | 46.8 | 47.7 | 49.3 |
| Life insurance companies | 251.0 | 308.3 | 338.4 | 376.0 | 407.0 |
| Money market mutual funds | 172.0 | 190.0 | 171.0 | 153.0 | 162.0 |
| Mutual funds | 961.3 | 822.0 | 1,095.0 | 1,279.0 | 1,432.0 |
| Other self-directed accounts | 980.1 | 950.0 | 1,118.6 | 1,258.7 | 1,392.4 |
| Total | 2,619.0 | 2,533.0 | 2,991.0 | 3,336.0 | 3,667.0 |
| Source: Board of Governors of the Federal Reserve System | |||||
