Required distributions-turned-donations cut taxable income

Between 1975 and 1999, the total value of assets set aside in pensions, 401(k) plans and IRAs increased to more than $12 trillion from $400 billion, according to the National Bureau of Economic Research, and the majority of that amount is pretax.

Once IRA owners turn 70 1/2, Uncle Sam requires that they begin taking distributions from this money that has not been taxed. This is referred to as the required minimum distribution.

The recently adopted Pension Protection Act of 2006 provides a new charitable planning opportunity for those individuals over 70 1/2 who are taking their required minimum distribution. For 2006 and 2007 only, these individuals can use required minimum distributions to make charitable contributions. By transferring all or part of the money they are required to take to charity, rather than considering it as income, the donors will have lower taxable income, and lower taxes.

Even though 2006 is over, donors should strongly consider using this opportunity for 2007. There are several issues to consider when determining whether donating required minimum distributions to charity would be a useful strategy:

• Simplicity. Providing instructions to an IRA custodian to transfer funds to a public charity is a simple process to undertake.

• Social Security. Donors receiving Social Security benefits can avoid increasing income above the two income levels that make different percentages of Social Security benefits taxable. Keeping the IRA-required minimum distributions out of taxable income could decrease how much tax is paid on Social Security benefits.

• Standard deduction. Seniors who do not have enough deductions to itemize gain no benefit from deductible charitable contributions. By using their required minimum distributions as donations, however, they still avoid the inclusion of the donation in taxable income, so the deduction is not an issue.

These are just a few of the reasons why IRA owners who are over 70K should strongly consider using their IRA required minimum distributions for charitable contributions. A tax and investment adviser can help determine whether this strategy is a good opportunity for individual situations.

Troy E. Kennedy is executive vice president and shareholder with locally owned and independent Springfield Trust Co. He may be reached at tkennedy@springfieldtrust.com.