Provision Allows for Tax-free Charitable Transfers from IRAs

Chico, CA – 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. In August 2006, 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, but only for two years. The 2006 benefit expires December 31; the 2007 benefit is good only from January 1 to December 31, 2007.

“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 Alexa Valavanis, CEO North Valley Community Foundation.

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,” Valavanis said. “Experts estimate heirs may receive only 25% to 30% of IRA assets that pass through estates.”

A provision in the new federal Pension Protection Act of 2006, 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 important—is not taxed, preserving the full amount for charitable purposes. The law covers gifts made this year and next.

In 2006 and 2007, holders of traditional IRAs who are at least 70½ years old can make direct charitable transfers up to $100,000 per year. A single person can transfer $200,000 free from federal tax; a married couple can transfer up to $400,000 free from federal tax from separate accounts. As a qualified public charity, North Valley Community Foundation 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 at the end of 2007 unless Congress extends it,” said Valavanis. “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.”

Through philanthropic services, strategic investments and community leadership, North Valley Community Foundation helps people support the causes they care about, now and for generations to come.

IRA MARKET SHARES BY HOLDER, 2001 - 2005

($ billions, end of year)