NEW YORK (CNNfn) - With all the cash building up in retirement accounts these days, apparently some people feel that they have more than they will ever need.|
Instead of losing it all to Uncle Sam after death, IRA owners would like to see it do some good now and are looking for tax efficient ways to gift some of their IRA money to charity. These IRA owners realize that giving an IRA to charity is an effective way to redirect tax dollars to worthy causes of their choice instead of letting the government decide where that money will go.
The problem is, you cannot do it. You cannot gift an IRA to charity while you are living. A charity can be named as the beneficiary of your IRA but that adds other tax complications and still does not allow an IRA to be gifted. Currently, the only way that an IRA owner could gift an IRA to charity during his lifetime would be to first withdraw from the IRA and then contribute the funds to the charity. But the withdrawal would be taxable.
If you are younger than 59-1/2 years old, you would also be subject to a 10 percent penalty. That's a big hit for simply wanting to make a donation of part or all of your IRA.
You would receive a charitable deduction, but only if you itemize -- and even then, the deduction would not completely offset the income tax and possible penalty on the distribution. That's because the tax deduction for the contribution could be limited by income, and you would not receive a deduction for the 10 percent penalty if it did apply.
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New tax proposal
On May 11, Rep. Bob Franks, R-N.J., introduced a bill in Congress that would allow IRA owners and 401(k) plan participants to donate their IRAs or 401(k)s to charity without triggering a taxable distribution. The bill is H.R. 4433: Charitable Contribution Tax Relief Act of 2000.
The provision would be effective for tax years beginning after the date of enactment. But don't get too excited. This is only a proposal. It is far from law and unlikely to ever be enacted.
So why even bother to mention it? To let you know that Congress is aware of the issue, which means that it is possible that at some point, a version of this proposal could make it into law. It is also good to know since there are IRA owners who often ask if there is any mechanism to allow them to give away part of the IRA while they are alive without causing a tax. This bill would accomplish that.
When compared to the numerous other tax law proposals, this bill does not seem to be a high priority issue. However, it would be great for charities that would be able to receive donations faster and in greater amounts. The government generally likes laws that increase donations.
The thinking is that the more money that is contributed by taxpayers, the less the government will have to kick in somewhere down the road. Many IRA owners already realize that their IRAs have grown so much that it's better to give some of it now to charity rather than lose it to the government.
The bill would allow money to be withdrawn from an IRA or 401(k) and if that money were contributed to charity, the distribution would not be taxed. Also, you would not receive a tax deduction for the contribution.
This makes sense because allowing both a tax-free IRA distribution and a tax deduction would be double dipping. As far as the IRA owner is concerned, tax-wise it would be a wash. There is no tax on the IRA or 401(k) distribution and no deduction for the contribution. The winner is the charity and the loser would be the U.S. Treasury. Since under this proposal gifts would be made sooner, all future growth would benefit the charity rather than accumulating in the IRA owner's estate to be taxed at an excessive combination of estate and income tax rates.
We'll have to wait and see how this pans out. But for right now, you still cannot gift an IRA without paying the tax first.