Talking to your donors about tax-free charitable IRA rollovers?

By John T. Keith, J.D., Consultant, Johnson, Grossnickle and Associates

Educating donors about the benefits of charitable IRA rollovers is a great way to uncover future planned giving prospects. This flexible giving vehicle provides donors a tax-free method to support their favorite causes, whether they itemize their deductions on their federal tax return or not.

Since they were first created in 1974 as a part of the Employee Retirement Income Security Act (ERISA), Individual Retirement Accounts (IRAs) have become a featured financial and tax planning tool. Some of your organization’s donors have saved for retirement for years through IRA accounts and then, upon retirement, they discover that they don’t yet need the IRA. Given a choice, these donors would simply allow their IRA funds to stay in the account and continue to grow for the future, however, IRA owners are required to begin taking minimum withdrawals after age 70 ½.

The charitable IRA rollover allows such donors to make charitable gifts directly from their IRAs to your organization. The amount that is sent directly to charitable organizations counts toward their Required Minimum Distribution for the year, as if they had received it themselves. However, because the funds went to charitable organizations, the donor pays no income tax. This is a great way for your donors to support your mission while saving income taxes.

Some donors no longer claim itemized deductions on their federal tax return. Perhaps, they have paid off their home mortgage or they have downsized to an apartment. Because they do not itemize, when they write your nonprofit a check they are often receiving no tax benefit for their gifts.

Congress is now considering a significant expansion of the standard deduction that, if enacted, would dramatically reduce the number of taxpayers itemizing their deductions. With the IRA rollover option, your donors can make the same (or larger) gift and receive tax savings by avoiding the income tax they would have paid for taking the required minimum distribution. This tax saving aspect is available to those who itemize as well as those who don’t.   

Quick review

Let’s review the basics.

• The rollover is available only from IRA accounts. This cannot be done directly from other retirement accounts such as a 401(k) or 403(b) accounts. (Some donors may be able to complete a two-step process by making a tax-free rollover from these accounts into an IRA and then making an IRA rollover gift from that new account).
• The donor must have reached age 70 ½ (the age when required minimum distributions begin).
• Each individual donor can make IRA rollover gifts of up to $100,000 per year (which can be to one charitable organization or divided and distributed to many charitable organizations). Married couples can each give up to $100,000, so long as they each have IRA accounts.
• Rollover gifts cannot be used to fund charitable gift annuities or charitable remainder trusts. They also cannot be transferred to donor advised funds.
• The donor cannot receive any value in return for the gift. For example, some alumni associations accept donations that include a subscription to the alumni magazine. They report back to the donor a reduced charitable gift value that has been discounted by the value of the subscription. The IRA rollover should not be used to fund such gifts.

What action should your organization take?

Add this gift option to your marketing plans going forward. Be sure to include it in both your annual giving materials and your gift planning materials.

Also, be sure to track in your system (or a separate list if necessary) anyone who makes a gift to your organization through a charitable IRA rollover. What have these donors communicated to you by making this specific type of gift?

1. They have an IRA but they don’t really need all of the spendable income from it in retirement. That is the primary reason for having an IRA and yet they don’t appear to need it for that purpose.
2. Out of the universe of charitable organizations available to them, they have chosen you to receive this gift.
3. They are 70 ½ or older.

Let’s face it, these are excellent planned giving prospects. An IRA account is a great way to save for retirement and defer taxes. It is not a great way to transfer assets to kids or grandkids upon death.

Through careful and considerate personal cultivation of these relationships, you may find that a number of these donors will decide to also name your organization as a charitable beneficiary of the IRA upon death. This is another way for them to support their favorite causes and to make a philanthropic impact that they always wanted to achieve, but believed they could not reach.

* The content in this blog is provided for informational purposes only and should not be construed as legal or financial advice.  Any individual making or considering a charitable gift should always seek their own legal, financial, tax or planning counsel as to the applicability of any charitable deduction or tax law as it relates to their personal financial situation.  Those who advise charitable donors should encourage the same.