If it becomes law, the Legacy IRA Act will be a powerful tool for both retirement planning and charitable giving.
Currently, there are only two ways to give your IRA to charity without triggering a tax.
First, if you are age 70 ½ or older you can make a direct gift from your IRA to qualified public charities. Donor Advised Funds and Support Organizations don’t count. The gift is limited to $100,000 per year. The direct gift from your IRA is not a taxable distribution for federal income tax purposes. You don’t get a charitable deduction, but you also don’t get taxed on the “income” distribution. This makes it just as good if not better than a charitable deduction.
This was first enacted in 2006 and became permanent under the PATH Act of 2015.
Second, you can name a qualified charity as the beneficiary of your IRA on death. The charity gets nothing while you are living, but at your passing, the entire IRA goes to charity. Again, there is no charitable deduction, but there is also no taxable income. This is a highly effective way to eliminate both estate taxes and income taxes on an IRA at death.
Recently, the House introduced The Legacy IRA Act (HR5171). This proposed bill essentially permits an individual to roll over their IRA to a charitable life-income plan such as a Charitable Remainder Trust or Charitable Gift Annuity. Under the proposed legislation, the “qualified” charitable donees would be the same as the $100,000 per year direct gift (Public Charities, but no Donor Advised Funds or Support Organizations).
There is still an annual cap of $100,000 for direct gifts and a combined annual cap of $400,000 for direct gifts and life-income transfers.
The proposed bill “sunsets” or expires after four years. This means it is just an experiment. It may or may not be extended depending on its fiscal consequences and voter popularity.
The Charitable Life-Income IRA Rollover has been noticed by the industry but is not law yet. Politicians are on every possible side of the issues. It was introduced May 6, 2016, and has a long way to go. You can track the status of the bill here.
This bill would ultimately benefit retirees, charities, and the IRS. Retirees would have the ability to manage IRA distributions, retain their lifetime income stream, and support their charitable causes without penalty. Charities eventually receive the remainder to fulfill their mission when the retiree can longer use the money. Over time, this would give a big boost to voluntary charitable solutions for social problems. This has the potential to reduce the need for certain government expenditures. The politicians still get tax revenue to do with as they will. Taxable income is paid from the charitable vehicle to the retiree. It is win-win-win.