Question: Can I take money out of my retirement account and give it to my church?
Valerie RumboughAnswer: Taking funds out of your retirement account and then turning around and giving it to your church seems simple, but sometimes it can actually cause adverse tax consequences.
For example, every dollar that you take out of your retirement account may have to be claimed as income on your income tax return. Although you may deduct the same amount on Schedule A, it may not be a complete wash due to several factors such as income limitations for example, and you may end up owing more income tax than you would have otherwise. You may also be subject to a penalty if you are not at least 59 when you make the withdrawal.
Congress has allowed one kind of withdrawal, however, that you may be eligible for. Certain individuals may transfer funds from their IRA or Roth IRA account directly to their church or other charity, up to $100,000, if the individual is at least age 70 on the day they make the transfer. This law is in effect through Dec. 31, 2007. Congress is currently considering extending this law through 2008.
Transfers from other qualified retirement plans are not eligible. Individuals may consider rolling over funds from other qualified plans into a qualifying IRA and then making the distribution. However, this may become an awkward situation if an individual opens an IRA with a plan administrator, only to make a distribution from it shortly thereafter.
A married couple could contribute up to $200,000 in 2007, provided each spouse owns at least one qualified IRA and they each meet the other requirements as previously stated. In addition, the contribution made can be applied toward an individual’s minimum required distribution. It is important to note that the transfer has to be made directly from the plan administrator to the charity. Individuals need to be sure that their plan administrator informs the charity who the gift is coming from so that the charity can provide the proper acknowledgment of the gift. They may want to contact the charity directly to inform them that the gift is on the way.
Certain charitable contributions do not qualify, such as gifts to donor-advised funds and supporting organizations. However, institutions handling these types of accounts many times have other ways to receive contributions that are allowed. In addition, contributions must be outright gifts. Deferred gifts using instruments such as gift annuities and charitable trusts are not allowed. Even with the limitations, this can become a wonderful way for individuals to make a meaningful contribution to their church without tax consequences.
Editor’s note: In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purposes. Rumbough, CPA, CFP, is vice president of finance with the Baptist Foundation of South Carolina. For more information, call 800-723-7242.