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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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)

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists Pension Protection Act of 2006  Case example  $500,000 IRA account, with a $30,000 Required Minimum Distribution A.$30,000 to charity B.$10,000 to charity, $20,000 to owner C.$100,000 to charity, $30k to charity #1, $30k to charity #2, $30k to charity #3 and $10k to charity #4 D.$100,00 to charity and 50,000 to owner

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

James E. Connell FAHP, CSA Connell & Associates Charitable Estate and Gift Planning Specialists 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

Pension Protection Act of 2006