In 2006, Congress passed the Pension Protection Act of 2006. Pursuant to Section 1201 of the Act, individuals may utilize funds in their Individual Retirement Accounts (IRAs) to make charitable contributions. Although this provision had expired for years after 2007, Congress recently extended Section 1201 to apply to charitable contributions made in 2008 and 2009.
Typically, most withdrawals from an IRA are subject to Federal income tax. Under the Act, individuals over age 701/2 may withdraw up to an aggregate of $100,000 per year from their IRAs tax free, so long as such amount is contributed to certain qualified tax-exempt organizations before the end of the year of withdrawal. The withdrawal amount may be used to satisfy the individual’s minimum required distribution. Although the charitable contribution is not tax deductible, the amount withdrawn is not included in the IRA participant’s income.
This provision offers a significant planning opportunity for individuals over 70 1/2 who wish to make charitable contributions in 2009. (Note: The individual must be over 70 1/2. Thus, if the person reaches age 70 on March 31, 2009, the withdrawal cannot occur until after October 1, 2009.) The provision does not apply to withdrawals from qualified retirement plans, such as 401(k) accounts. However, an individual may convert a 401(k) account to an IRA to take advantage of this provision. This provision now expires on December 31, 2009, so individuals should plan accordingly. Please note, for individuals required to take minimum distributions under an IRA or 401(k), under new legislation, there is no required distribution for 2009.