A recent change to the U.S. Tax Code is being seen by Sacramento area nonprofits as a major win for their capacity to raise funds through charitable giving.
The change comes by way of Congress’ passage and President Barack Obama’s signing in December of a provision to make charitable rollovers from individual retirement accounts permanent. The rollover option, under the Protecting Americans from Tax Hikes Act of 2015, permits individuals 70 1/2 years or older to roll over as much as $100,000 from an IRA directly to a qualifying charity or nonprofit.
The timing of the new law may be significant given the mushrooming number of baby boomers reaching retirement age and the 70 1/2 -year old benchmark. A Merrill Lynch study released in October found that a potential giving surge exists in the United States over the next two decades – with an estimated $8 trillion expected to be given by retirees.
“There is no question that significant wealth will be changing hands over the coming decades,” said Michael Hardy, wealth adviser with UBS Financial Services. “It’s definitely a rallying cry for nonprofits to create compelling reasons why they are worthy beneficiaries of that exchange.”
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The IRA charitable rollovers are tax-free and not included in adjusted gross income. The rollovers also count toward the required minimum distributions that IRA account owners must take at age 70 1/2 . By designating funds to go directly to charity, individuals can limit their taxable income and avoid consequences for Social Security and Medicare benefits based on income.
The new law does not apply to Roth IRAs, to the rollover of charitable gift annuities or charitable trusts or to donor-advised funds.
Most nonprofits, from food banks to arts organizations, stand to gain. However, it may be arts nonprofits that stand to benefit the most given the struggles they have weathered since the economic downturn of 2008, when arts organizations saw deep cutbacks in donations from foundations, corporations and state and federal grants.
In the Sacramento region, where corporate giving lags behind similar regions, and where foundation grants have shifted away from arts organizations to social services, the rollover’s permanent status is expected to have an impact on arts groups’ bottom line.
At the Crocker Art Museum, the rollover has already become a key option for those who wish to contribute to the museum. Such charitable gifts typically range from $10,000 to $100,000, said Lial Jones, director of the Crocker. Since 2005, the museum has received roughly $700,000 by way of the rollover option, Jones said.
At the Sacramento Philharmonic, the permanency of the tax rollover option will make for a more stable, long-term fundraising horizon, said Alice Sauro, executive director.
“The long-term planning is significant in that it gives us the ability to build a funding program around it without wondering if the program will need to be dissolved from one year to the next,” Sauro said.
The IRA charitable rollover was first enacted into law as part of the Pension Protection Act of 2006, but Congress has allowed it to lapse several times. Each time, Congress retroactively extended the provision with weeks or days left in the calendar year, Hardy said. Congress only allowed for tax planning in one year, 2014, by enacting the rollover ahead of time.
Because Congress often renewed the provision retroactively late in the year, Hardy said none of his clients opted for the rollovers: “Virtually no one could take advantage of it unless you went back to your financial institution and asked them to reclassify the contributions.”
He contends that many individuals may have benefited and opted for the rollovers if they could plan for them.
“Now that it is in the books and there is some predictability in the tax codes, I have a feeling many financial advisers will use it as part of their arsenal,” he said.
The rollovers will also be a point of interest at the Sacramento Region Community Foundation, which manages endowments for more than 60 nonprofits, including the B Street Theatre and the Sacramento Gay Men’s Chorus.
“This represents a significant opportunity,” said Shirlee Tully, chief development officer at the foundation. “All of our funds – except donor-advised funds – can accept a rollover gift from an IRA.”