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Savers Can’t Return IRA Payouts for Charity, IRS Says

U.S. President Barack Obama
U.S. President Barack Obama signs into law an $858 billion bill extending for two years Bush-era tax cuts in the Eisenhower Executive Office Building in Washington, D.C. Photographer: Olivier Douliery/Pool via Bloomberg

Taxpayers in the U.S. who took required minimum distributions from their Individual Retirement Accounts last year won’t be able to return them to give directly to a charity, the Internal Revenue Service said.

For savers age 70 1/2 and over, the tax bill signed by President Barack Obama last month includes a provision that allows them to donate up to $100,000 from a traditional IRA directly to charity without incurring income taxes. Some taxpayers who had already taken their distributions in 2010 were questioning whether they could return their payouts and then make charitable donations.

“Required minimum distributions (RMD) from an IRA received by a taxpayer cannot be rolled over to an IRA,” according to a statement from the IRS on Jan. 5.

Mandatory distributions from traditional IRAs, which have tax-deferred contributions, must be taken starting at age 70 1/2. Roth IRAs, which are taxed up front and have tax-free withdrawals during retirement, don’t require distributions.

Donors who used their distributions after the bill was signed on Dec. 17, or used them this month, to make direct charitable gifts don’t have to recognize the money as income for 2010.

No Penalties

Individuals won’t be penalized for not taking their required minimum distributions by Dec. 31 if they elect to make a direct charitable donation this month and have it applied to 2010, according to Mitch Drossman, national director of wealth planning strategies for New York-based U.S. Trust, which manages almost $300 billion in client assets.

Qualified taxpayers who requested checks payable directly to charities from their IRAs before the bill passed will not have to recognize the income because the provision applies to 2010 retroactively, Drossman said. They must be at least 70 1/2 at the time of the donation to get the exemption, he said.

Savers also have all of 2011 to make direct charitable contributions without incurring income taxes until the provision expires at the end of the year.

Statistics on how many taxpayers took required minimum distributions in 2010 aren’t yet available, said Eric Smith, a spokesman for the IRS.

Fidelity Investments has received calls about returning IRA distributions from clients and they’ve expressed disappointment that they can’t, said Mike Shamrell, a spokesman for the Boston-based mutual-fund company.

The statement by the IRS was reported by the Wall Street Journal earlier today.

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