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What Is an IRA Charitable Rollover?

By Mark Wollacott
Updated May 17, 2024
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The Individual Retirement Account (IRA) charitable rollover is a mechanism allowing individuals in the United States to donate money tax-free from their IRA account. It is intended to encourage charitable giving among wealthy people in the U.S. The IRA charitable rollover was introduced in 2006 as a key element of the Pension Protection Act, and it was renewed under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. It forms a small part of the tax cuts instigated under President George Bush and renewed under President Barack Obama.

IRAs are used by individuals to generate money for their retirement savings. Money is earned through investments. There are several types of IRAs, including traditional IRAs, Roth IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs and Simplified Employee Pension (SEP) IRAs.

As part of their IRAs, account holders are expected to withdraw a minimum amount of money from the account after they reach the age of 70-and-a-half. The amount of money is calculated using a uniform table. The principle is that the holder will use the money for living expenses. Those who have the largest accounts rarely require the money for living expenses. They usually withdraw the money late into the year in order to maximize their tax-free interest.

The money withdrawn from the IRA is counted as income and is taxed accordingly. The Roth IRA is an exception because it is a post-tax account. Holders of traditional IRAs and Roth IRAs are eligible for the IRA charitable rollover. In principle, if the account holder donates as much as $100,000 US Dollars in one year, he or she can avoid paying tax on it.

To qualify, the individual must meet a number of criteria. The money must be paid directly from the account to a publicly registered charity. The IRA charitable rollover money cannot be donated to a trust fund, to a charity that is advised by the donor or to a foundation. The donor cannot claim tax deductions from any charity that has given the donor a gift or service of some kind in return for the donation.

An individual can receive the IRA charitable rollover by withdrawing the money as income then making the donation. After the donation is complete, the donor needs to receive a receipt from the charity to prove the donation took place. The donor can then claim the money as tax-deductible income. The money is then taken from the donor's adjusted gross income (AGI) before his or her taxes are calculated.

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