Setting Up an IRA RolloverTo Donate Money to Charity

By KELLY GREENE
November 11, 2006;PageB4

I am over 70½ and am taking minimum withdrawals from a company-sponsored 401(k). I can't convert my whole 401(k) plan to an IRA rollover but could do a partial rollover.

The new provision that $100,000 from an IRA can be contributed directly to charity in each of the years 2006 and 2007 is of interest to me if I can indeed set up an IRA rollover expressly to give the principal to charity. Is this possible? I have been told that setting up a rollover will require that I take my minimum withdrawal for this year, which would negate one of the provisions of this new plan. Is this true?

-- Everett MacLennan
Edina, Minn.

You are correct, you meet the age requirement under the pension law for transferring up to $100,000 a year in funds from an individual retirement account to a charity. The break is available only for donations made after Aug. 17 through the end of 2007. And a transfer from an IRA counts toward taxpayers' required minimum distributions for that year.

The same perks, however, don't apply to 401(k) accounts. You can roll over some assets from your 401(k) to an IRA, then transfer up to $100,000 to a charity. (Note: Make sure the money goes straight from your IRA to the charity, without your handling it in between.)

But before you transfer any of your 401(k) assets to an IRA, you still have to take the required, minimum withdrawal from your 401(k). There's a federal rule "that you cannot roll over a minimum required distribution" from a 401(k) to an IRA, says Natalie Choate, a Boston tax attorney and author of "Life and Death Planning for Retirement Benefits." "The very first dollars that come out of a retirement plan in any year are the required minimum distribution."

So, for example, if you have $100,000 in your 401(k) plan and your required distribution is $5,000 this year, you must take that first, paying any applicable taxes. Then, you could roll $95,000 into an IRA and give it to charity, tax-free.

You may want to reconsider rolling over all of your 401(k) assets to an IRA, says Ed Slott, an IRA consultant in Rockville Centre, N.Y. By doing so this year, you would be able to donate $100,000 directly to charity next year, including your required minimum distribution. (That is, as long as your minimum withdrawal would be $100,000 or less.) "In almost every case, it's better to get the money into an IRA, because it gives you more flexibility," he says.

Here's how the break typically works: You get an exclusion from gross income for otherwise taxable distributions of as much as $100,000 from the IRA, as long as that money goes directly to a qualified nonprofit group. Also, it's much tougher to have contributions count when made to a donor-advised fund or private foundation, says Mark Luscombe, principal tax analyst at CCH Inc., a Riverwoods, Ill., tax publisher and a unit of Wolters Kluwer.

One other point: This law simply allows an exclusion this year and next from your gross income for otherwise taxable distributions that go directly to qualified charities. You can't take a charitable deduction on your return for any part of those distributions that would otherwise have been taxable.

This short-term perk could be advantageous for people who otherwise "might not be entitled to take a full charitable deduction, or who are in an income situation where your itemized deductions are subject to phase-outs," Mr. Luscombe says.

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