This week, Gail answers questions about IRAs and offers details on the new provision that allows you to donate to charity directly from your IRA.

Dear Gail,

I found out earlier this year that, since I am still working at 70 1/2 years of age and still contribute to my employer's 401K plan, that I do not even have to specify a RMD or take a distribution until I either end my employment or stop contributing to the plan. Did I hear wrong or is this correct?


Dear Gary,

Your information is partially correct … and just wrong enough to get you into trouble with the IRS.

Under the tax code, you normally have to start required minimum distributions (RMDs) from IRAs and employer-sponsored retirement plans after you reach age 70½.

Technically, the deadline is April 1st of the year after you turn 70½, which is called your “required beginning date.” For instance, if you turned 70 in February, you would have turned 70½ in August; the latest you could take your first RMD would be April 1, 2007. On the other hand, if your 70th birthday was last July, your required beginning date would be April 1, 2008 because you don’t turn 70½ until January 2007.

There is an exception to this that only applies to certain company-provided retirement plans: If you are still working at age 70½ and if you do not own 5 percent or more of the company, you do not have to withdraw any money from your account in the plan until you are no longer working there. In IRS-speak this is called being “separated from service.” In your case, this would presumably occur when you finally decide to retire.

April Caudill, J.D., CLU, ChFC, is managing editor of the National Underwriter’s “Tax Facts.” She says this isn’t automatic. A plan must specify that this exception applies. However, according to Caudill, “Most do.”

Notice that this exception only applies to required minimum distributions from the plan provided by your current employer. If you still have an account in a 401(k), 403(b), profit-sharing, or other “qualified’ plan sponsored by a previous employer, you must start distributions from this account by your required beginning date.

Continuing to work beyond age 70½ also does not excuse you from having to take RMDs from IRAs and IRA-based retirement accounts such as SIMPLE and SEP plans. (Required minimum distributions are never required from a Roth IRA.)

The rules that govern when you must take RMDs from your current employer’s plan are not affected by whether or not you are contributing to it. If you are still working for this company at age 70½ the triggering event is when you leave your job.

Hope this clears things up,

Hi, Gail-

I read your article about the new pension law and the ability to give money from your IRA to a charity. Here are my questions:

If I instruct my IRA custodian to send my RMD to my church (it will only be around $2000), can I still itemize other charitable donations that have nothing to do with my IRA or RMD?

Will I receive some sort of statement proving I did this and have taken my RMD for the year?


Dear Charlotte,

Under the Pension Protection Act of 2006, individuals who are at least 70½ years old — the age at which they must begin taking required minimum distributions (RMDs) from their IRAs — can request that this amount be sent directly to a charity.

Provided you don’t need the money for living expenses, this offers some nice tax advantages:
1) The distribution is not included in your “gross income” and, thus, doesn’t negatively impact tax deductions that you might have.
2) You get credit for taking your RMD, but don’t have to pay income tax on it.
3) Because your withdrawal is not reduced by taxes, the charity receives more money.

This is not an “all or nothing” proposition. You could split your RMD so that part of it is sent directly to a qualified charity and the rest is sent to you. In this case, you would pay income tax only on the amount you receive. In addition, you are not limited to the amount of your RMD. You can transfer up to $100,000 out of your IRA.

But this privilege is only available for a limited time — calendar years 2006 and 2007. So you need to act quickly if you want to take advantage of it.

If your IRA contains both pre-tax and after-tax contributions, there’s another advantage of sending a charitable donation directly from your IRA: this amount is deemed to come from pre-tax contributions first. By reducing the pre-tax portion of your IRA, the effect is that after-tax contributions represent a higher percentage of your account. This will reduce the income tax you have to pay when you take regular RMDs in the future.

Because a direct donation from your IRA to a charity is not reported as “income” on your tax return, you do not get to deduct it. However, you can deduct any other contributions you make to charities.

At the very least, your “receipt” will be the statement you regularly receive from your IRA custodian. It will show that a distribution was made from your account. In your case, this would be $2,000.

According to a spokesperson for the Internal Revenue Service, your IRA custodian will still send the usual Form 1099-R to both you and the IRS. This form states that you took a distribution from an IRA and the amount. However, 2006 tax return forms have been updated to take “qualified charitable donations” (QCDs) from IRAs into consideration.

If you file your taxes using Form 1040, for instance, you report the total amount distributed from your IRA on line 11a. Then on line 11b, you enter the amount that was not donated to charity, in other words, how much of the distribution was sent to you. In your case, assuming you are not withdrawing more than your RMD this year and are directing that the entire $2,000 be sent to your church, you would enter “0.”

Hope this helps,

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.