If you work with prospects in their late 60s or older – and who among us doesn’t have Baby Boomers in our portfolios? – or with their adult children, this is the perfect time of year to be educating or reminding them about utilizing an IRA Charitable Rollover.
If you haven’t heard of this legislation, you’re certainly not alone, but developing a solid understanding of it can help you facilitate great gifts. Prepare to market this opportunity on an organizational level and to become the best-informed gift officer your prospect knows.
First, let’s review the logistics. Women and men who have accumulated retirement savings through an IRA face an annoying, if not aggravating, drawback of being great planners. When they reach 70½ years of age, whether or not they are still working, annual required minimum distributions begin. These distributions are calculated according to remaining life expectancy (the shorter it is, the more one is required to withdraw) and size of the account. This wouldn’t be troublesome but for the fact that the distribution is subject to income tax (ouch). Particularly for a septuagenarian still gainfully employed – and likely earning a hefty income near the end of his or her career – losing a significant portion of the distribution in taxes feels like a sharp stick in the eye.
Inception of Charitable IRA Giving
In August 2006, the federal government initiated the Pension Protection Act, which included a “charitable IRA rollover” provision that allowed US donors to make charitable gifts directly from an IRA – without recognizing it as income first. Hurrah! (Use of the word “rollover” is a bit of a malapropism, of course, because the donor is gifting the investments.) There were some restrictions, however: the donor had to be 70½ years or older, and the maximum total given in one tax year could not exceed $100,000. But, oh, the benefits: not only did the legislation help nonprofits, but it was also a boon to the owners of retirement accounts – particularly large ones. For the first time, these individuals were able to make a charitable gift from an IRA and reap two important rewards: 1) count the gift toward satisfaction of their annual required minimum distribution, and 2) diminish taxable income.
From 2006 to December 2015, the IRA charitable rollover stipulation expired each year and was re-approved on an annual basis – usually in the final month of the year. This legislative lethargy often meant that donors, even if they were aware of the opportunity, could not be certain until the proverbial last minute that they would be permitted to make a charitable IRA contribution in a particular year. Rather than engage in a mad dash of year-end contribution decision-making, most thoughtful donors had likely made all of their substantial philanthropic gifts by the time the law was renewed each December. Therefore, they lost out on the opportunity to utilize this giving vehicle, and potential recipient organizations lost out as well.
Thankfully, on December 18, 2015, IRA charitable rollover legislation was signed into law permanently in the Protecting Americans from Tax Hikes (PATH) Act. Last year, 2016, was the first year when donors could be sure, from January 1 onward, that they could consider the charitable IRA option in their annual or longer-term gift planning. This year, 2017, marks the second year when donors and the gift officers who work with them can consider this vehicle for gift making.
So what exactly does this mean for you? First, you can start talking about this legislation and gift opportunity with your prospects right now – it’s not in jeopardy of going un-renewed. Furthermore, your prospects can plan thoughtfully to use an IRA charitable rollover gift this year or in coming years, along with gifts such as cash or appreciated stock. Those prospects who take advantage of the legislation are likely to thank you for helping them to discover a more advantageous, and usually less expensive, manner to support your institution.
Your prospect’s investment advisor may not know much about this gift vehicle, so make sure you are sharing the information proactively with constituents. However, a donor who wishes to use this vehicle should always consult his or her investment and tax advisors – don’t try to offer this advice yourself, as circumstances and implications vary. Also, it’s important that the contribution be made directly from the IRA to a 501(c)3 organization, without passing through the donor’s hands (this is similar, for obvious reasons, to the manner in which charitable gifts of securities must be handled). Furthermore, the donor may not make the IRA charitable gift to a foundation, donor-advised fund, or supporting organization; it must be made directly to a charity. For receipting purposes, institutions should craft a specific acknowledgment for these gifts, detailing the account from which the gift was made (i.e., the financial institution on the check) and acknowledging the donor as having directed it from that account.
If you’re able, market this opportunity widely – both passively and actively – to your prospects. Don’t allow the restrictions of the legislation or assumptions about IRAs to limit your thinking. For example, individuals who have not worked outside the home may not have a personal IRA account, but they may have inherited one from a deceased spouse. Called Beneficiary IRAs, they are subject to the same annual minimum distribution requirements. You may also wish to target messaging to the child(ren) of potential IRA-owners, who could discuss with their parent(s) the idea of making a family gift to your organization. And don’t let that $100,000 maximum fool you into thinking this is a law only for the wealthy: even modest donors of the right age can reap the tax advantages of giving you $1,000 from their IRA rather than their checking account.
Tax law may not be the most exciting topic for a visit with a donor, but adding this giving vehicle to your toolkit would be wise. Along with thinking creatively about how donors can support your institution, offering donors a variety of options for gift-making will demonstrate to your prospects that you care about more than securing a gift – you care about securing the right gift, in a way that feels right to your donor.