If you become age 70½ this year, you are required to make a withdrawal from your IRA by April 1 of next year; and if you are past that age, you already have been making the mandatory withdrawals. As you know, the percentage of your account balance that you must withdraw each year increases with age. Required withdrawals also apply to other plans, such as a 401(k) or 403(b), though certain exceptions apply to those who continue to be employed.
During each of the years 2006-2011 it was possible for an individual over the age of 70½ to make charitable gifts from an IRA. The gifts would count towards the mandatory withdrawal amount and would not be included in taxable income. The gifts could be made directly to any qualified public charity such as ours—but not to a private foundation or to a donor advised fund. The legislation allowing the IRA rollover expired at the end of 2011, but Congress still may extend it through 2012. We will inform you if that happens.
Whether or not the IRA rollover is extended, it is possible to make a gift using funds in your IRA or other retirement plan and perhaps arrange the gift in a way that is even more advantageous than the rollover. Consider this example:
George must withdraw $50,000 from his IRA this year. He does not need the money for living expenses, and he has been considering a charitable gift of $50,000. In George’s personal, non-IRA portfolio there is stock that has appreciated from $20,000 to $50,000, but he is thinking that, based on the future prospects of the company, it is probably time to sell the stock. Instead, George contributes the stock to support our work, realizing a charitable deduction of $50,000, and he avoids the tax on his $30,000 capital gain. Then he takes his mandatory distribution and uses the $50,000 cash withdrawal to purchase other securities deemed to be better investments at this time.
George is able to accomplish the following:
- Satisfaction of making a significant charitable gift to our institution.
- Meeting the withdrawal requirement from his IRA.
- No additional income tax because the charitable deduction on his stock gift offsets the taxable withdrawal from his retirement account.
- Repositioning the portfolio with a stepped-up basis.
The plan described here works in the case of mandatory withdrawals from any retirement plan, whereas the rollover option, which may possibly be extended this year, applies only to an IRA.