Released: August 22, 2006

Easier to donate IRA money to charity

Source: By Sandra Block, USA Today

Leaving money to charity when you die is a noble and selfless act. But giving money away while you’re still alive is a lot more satisfying.
A provision in the pension reform legislation President Bush signed last week will make it easier for older people to donate money in their individual retirement accounts to charity. The provision, which is effective only for 2006 and 2007, allows individuals who are 70½ or older to take tax-free withdrawals from their IRAs as long as that money goes directly to charity.

Ordinarily, when you withdraw money from your IRA, it becomes part of your taxable income for the year. If you donate the money to charity, you can deduct the contribution — but only if you itemize on your tax return. Many retirees who no longer pay a lot of mortgage interest don’t have large enough deductions to itemize.

Older people who itemize may also benefit, says Mark Joseph, a financial planner for Sentinel Wealth Management in Reston, Va. Even if you claim a charitable deduction for your IRA withdrawal, the rise in your income from your withdrawal can trigger a host of unintended consequences, from a phaseout of your personal exemption to taxes on your Social Security benefits.

Under the new provision, though, an IRA withdrawal that’s donated directly to charity is excluded from your income. You can’t claim the deduction. But you don’t have to worry about unintended consequences, either. “It truly is simple, which is so unusual for the tax code,” Joseph says.

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