Novel Approach to Take with Donors Wondering About the IRA Rollover for 2014

It likely will be the beginning of December at the earliest before Congress decides if the IRA charitable rollover is going to be reinstituted for 2014. But there remains another philanthropic use of an IRA distribution that generates significant tax benefits—and provides a novel approach you can take with donors.

Many donors who have been doing the IRA rollover have investments that have done very well this year. They may be interested in capturing that appreciation but don’t want to have to pay the capital-gain tax that can now be as high as 23.8 percent. That’s a whole lot of profit down the government drain.

So rather than waiting to see if the rollover is reinstituted, a creative and charitable strategy is to receive the IRA distribution—and make a separate gift to charity using appreciated stock that equals the distribution amount. Then the distribution can be invested, either in repurchasing the same stock or in other investments. The benefits are legion:

• The donor gets a charitable deduction for the fair-market value of the stock that offsets the tax liability on the IRA distribution.
• The donor is not liable for any capital gain when transferring the stock to charity, and the charity pays no capital-gain tax when it sells the stock.
• If the donor repurchases the same stock with the distribution, there is a new higher cost basis. If the stock appreciates some more and the donor later decides to sell, the gain and thus the tax will be less.
• If the donor doesn’t repurchase the stock, the distribution can be used to diversify into other investments that are more favorable.

This strategy takes several steps, while the IRA rollover is about as simple as, well, rolling over. But it’s just as effective in terms of saving taxes, and it can be used with other retirement plans such as a 401(k) or 403(b) in addition to an IRA.