Pension Protection Act of 2006

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Pension Protection Act of 2006

• A Guide to the
• IRA Rollover Provisions
• With Case Studies

James E. Connell FAHP, CSA Connell
Associates Charitable Estate and Gift Planning
Specialists
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Pension Protection Act of 2006

• Signed by Bush on August 17, 2006
• Allows for IRA rollovers to charity
• Both regular IRA accounts and Roth IRA accounts
  are eligible
• Charity must be eligible
• Individual must be 70 ½ or older on the date of
  contribution
• Qualified Charitable Distribution will qualify
  for the Required Minimum Distribution
  requirements of IRA
• 100,000 limit
• 200,000 from couple with separate accounts
• 2006 and 2007 transfers only
• Transfers from other pensions and profit sharing
  plans, i.e. Keogh, 401k, 403b, etc., are not
  allowed
• Possible to rollover above accounts to IRA if
  plan and time permit

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Pension Protection Act of 2006
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Pension Protection Act of 2006

• Eligible charities
• 501(c)3 public charities
• 509(a)1 and section 170(b)(1)(A)
• Field of interest funds
• Restrictions on use of gifts permitted (i.e.
  scholarship funds or building funds)
• Not Permitted
• 509(a)(3) supporting organizations
• Especially effects hospital foundations
• Donor advised funds
• Private foundations

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Pension Protection Act of 2006

• Permitted transfers/gifts for Qualified
  Charitable Distribution (QCD)
• Outright gifts only
• No charitable gift annuities
• No charitable remainder unitrusts
• No charitable remainder annuity trusts
• No pooled life income funds
• No quid pro quo gifts
• No personal benefits
• No special events
• No athletic tickets

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Pension Protection Act of 2006

• Suggested procedures
• Notify charity of potential gift
• Instruct custodian/trustee of IRA on the proper
  form and if no form send a complete letter of
  instructions with payment/gift to the charity as
  a third party payment
• Transfer will be mostly cash but in-kind
  transfers (i.e. securities) are permitted
• Keep records of transfer and substantiation from
  charity
• If appropriate, elect out of withholding

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Pension Protection Act of 2006

• Donor Profile Convenience Donor
• Most delay taking distributions until the last
  quarter of the year in order to grow the
  remaining funds tax free
• If actively making charitable gifts may consider
  the benefits of taking them from their IRA
  account(s)
• No inclusion in income
• No income tax deduction
• Qualifies for Minimum Required Distribution (RMD)

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Pension Protection Act of 2006

• Donor Profile Non-Itemizers
• May be donors with modest IRA account balances,
  but sufficient retirement income from tax exempt
  accounts
• Taking MRD may not significantly increase their
  lifestyle
• Do not have significant tax deductions
• State and local income taxes
• Interest expenses
• Medical expenses
• Charitable deductions
• So the standard deduction applies (2006), over 65
• Married/Joint 11,300 one/ 12,300 two
• Single 6,400
• Head of household 8,550

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Pension Protection Act of 2006

• Donor Profile Generous or Major Donors
• Most have large IRA accounts
• May be giving at or above the 50 of AGI limit
• May be subject to the 3 reduction rule if AGI
  exceeds 150,500 (2006)
• May wish to make a large gift with immediate
  impact for a special project in 2006 2007
• Carry forward may or may not be a concern because
  of age, health or wealth
• May have filled up their 30 limit with a carry
  forward and have no 50 assets to contribute

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Pension Protection Act of 2006

• Donor Profile Social Security Donor
• Social security is subject to two taxes
• A 50 tax at the first level
• A 85 tax at the second level
• Donors with income in excess of the second level
  may consider reducing their taxable income by
  making gifts from their IRA accounts thus
  reducing their taxable income limit

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Pension Protection Act of 2006

• Case example
• 500,000 IRA account, with a 30,000 Required
  Minimum Distribution
• 30,000 to charity
• 10,000 to charity, 20,000 to owner
• 100,000 to charity, 30k to charity 1, 30k to
  charity 2, 30k to charity 3 and 10k to
  charity 4
• 100,00 to charity and 50,000 to owner

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Pension Protection Act of 2006

• Case Example
• Carol in Florida, widow, husband, former DuPont
  employee, died under Hospice care, lives in a
  total care retirement facility, does not spend
  the income generated by her retirement assets
• Age 81, with 113,000 in IRA totally invested in
  Vanguard Windsor Fund
• Received her 5,500 RMD in January and reinvested
  RMD into Vanguard Tax Exempt Fund, has
  significant tax free retirement income
• Objective Give total IRA account to Hospice
• Plan Give 90,000 in November 2006
• Give balance of account in January 2007

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Pension Protection Act of 2006

• IRA account with deductible and nondeductible
  contributions
• IRA account value of 100,000 with 20,000
  nondeductible contributions and 80,000 of
  deductible contributions and earnings, no other
  IRA, normally withdrawals follow the pro rata
  rules
• 80K is distributed as a QCD
• Under the provisions of HR4 the QCD is considered
  coming from income first up to the total amount
  that would be includable in gross income
• All 80k is exempt from taxation
• Balance of 20k is not subject to taxation and
  can be withdrawn income tax free
• What if only 40k was distributed?
• Effects subsequent pro rata formula for taxation
  of RMD

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Pension Protection Act of 2006

• Other Concerns
• Conversions of other retirement accounts to IRA
  accounts
• Custodian or trustee reporting on 1099R
• Custodian or trustee minimum QCD levels
• State income tax impact for charitable gifts
• State income tax impact for QCD
• Electing out of withholding for MRD
• Charity substantiation for 250 following the
  rules of Tax Revenue Section 1.170A-13f,
  contemporaneous written acknowledgement

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Pension Protection Act of 2006
Thank You