For the past year, older savers have been allowed to take tax-free withdrawals from an individual retirement account if they donate the money directly to charity. Still, confusion lingers.
Ruth of Woodstock says she wants to take advantage of this tax break and donate to her church, but she hears conflicting information from her bank and credit union. What are the rules? she asks.
Last year's Pension Protection Act essentially allows those 70 1/2 and older to donate up to $100,000 each year from an IRA. (Since Roth IRA withdrawals are tax-free anyway, we're talking about a traditional IRA.) The donation must go directly from the IRA to the charity. This brief tax break expires at year-end.
As of mid-July, nearly 4,700 IRA charitable distributions have been made totaling more than $80 million, according to an informal survey by the National Committee on Planned Giving. The typical distribution is $5,000.
When Ruth went to her bank to make a charitable distribution, she says the teller told her she can only withdraw the minimum distribution each year, no matter what the purpose.
(A required minimum distribution is the amount the federal government says owners of traditional IRAs must start taking out after they reach 70 1/2 , so that Uncle Sam can start collecting taxes.)
And when she turned to her credit union, an employee told her the IRS says that people can only donate their required minimum distribution to a charity, nothing more.
Wrong. And wrong again.
People, of course, can always take out more than the minimum requirement from an IRA. And the law says the maximum charitable distribution from an IRA is $100,000 a year.
Ed Slott, an IRA expert in Rockville Centre, N.Y., says there's a lot of confusion about this tax break because it's so new.
"Most people don't realize this will save them taxes," he says. "People say, 'Why not take it out of the IRA, pay the tax and get a deduction?' "
That's because the charitable distribution won't be part of adjusted gross income on tax returns, unlike other IRA withdrawals, and that can make individuals eligible for more tax breaks.
Slott notes that IRA custodians, such as banks and financial institutions, can set their own administrative rules on these charitable withdrawals.
This allows them to prevent paperwork headaches, such as having a customer direct the bank to send $5 apiece to 500 charities.
If a bank or credit union is limiting donations because of some in-house rule, donors can always roll their IRA over to another institution that doesn't have such restrictions, Slott says.
That doesn't appear to be the issue at Ruth's bank and credit union. It sounds like she's getting wrong information, and that's troubling.
How many other retirees are running up against similar poor advice and will lose out on this tax break as a result?
Ruth can find out the rules on IRA charitable distributions on the IRS Web site at www.irs.gov. Check out the Dec. 14, 2006, article posted under the IRS newsroom for a simple explanation.
Armed with information, she should go back to her bank and work up the chain of command until she finds a supervisor who knows the rules.
If she strikes out, she can contact the regulator of the bank to intervene.
John J. McKechnie III, director of public and congressional affairs for the National Credit Union Association, suggests Ruth go to the supervisory committee of her credit union to resolve the problem.
The committee is made up of other credit union members. If she doesn't get satisfaction there, she can complain to NCUA, the credit union regulator, he says. The NCUA's consumer assistance center can be reached at 800-755-1030.
Questions? Comments? Write email@example.com.
MORE AMBROSE Find Eileen Ambrose's column archive at baltimoresun.com/ambrose