JACKSON — There’s some good news about IRAs that Trustmark National Bank’s Wealth Management Division is sharing with its clients. One is that people age 70 1/2 and older have an opportunity this year through the Pension Protection Act they’ve never had before. The other piece of news is the way self-directed IRAs can be a powerful retirement planning tool.
David W. Martin, vice president and director of Wealth Management Consulting with Trustmark, says the change in the Pension Protection Act is available only in 2007. This act allows charitable-minded individuals to make gifts from their IRAs and exclude these gifts from their gross income if they’re at least age 70 1/2.
“Under the law, you can make a lifetime gift using funds from your IRA without undesirable tax effects,” he said. “Previously, you would have had to report any amount taken from your IRA as taxable income and then take a charitable deduction for the gift, but only up to 50% of your adjusted gross income. In effect, this caused some donors to pay more in income taxes than if they did not make a gift at all.”
That opportunity has not been available before and may not exist beyond this year although Martin is optimistic the act will be extended.
“The Internal Revenue Service is dipping its toe in the water to see if it’s successful, and then may extend it into some kind of policy for years to come,” he said. “It’s exploratory and I think it will be extended.”
For Martin and others working in wealth management, the biggest obstacle is to educate investors in a short period of time. “We’re trying to get the word out. Nationwide not that many people know about it,” he said. “Before this act, you would withdraw funds from an IRA and you had to report the amount as income then take a deduction on what you gave to charity.”
To qualify, the following criteria must be met:
• The donor must be 70 1/2 years of age or older at the time of the gift.
• The transfer must go directly from the IRA to a qualified charity.
• Gifts cannot exceed $ 100,000 per taxpayer per year.
• Gifts must be made outright to charity; the donor cannot retain any benefits from the charity.
“Prior to making a gift, contact the charitable organization to ensure it is an eligible organization. Once you’ve received this confirmation, you should ensure that your IRA custodian or trustee makes the gift from your IRA to your designated charity,” Martin said. “It is also wise to consult your tax professional if you are contemplating a gift under this new law.”
Martin, who’s authored and taught courses about IRA planning to attorneys, CPAs, trust officers and planned giving professionals, stresses the importance of the funds going directly to charities.
“The charities I’ve spoken with are excited about this change, and I know they’re getting more donations,” he said. “I think a lot of people will take advantage of this opportunity. We’ve had a lot of inquiries about it. It’s a good thing and hopefully will get better.”
As for self-directed IRAs, Martin says few financial institutions offer them in Mississippi. “The term ‘self directed’ does not have any legal connotation,” he said. “It does not imply a different type of IRA or a separate set of IRS rules.”
Self directed, he explains, is simply an accepted industry term indicating that a financial institution will allow IRA owners to pursue a wide variety of investments, such as real estate, businesses or closely-held stock. A self-directed IRA allows the owner to invest assets in anything except life insurance and collectibles.
“Most financial institutions only offer traditional IRAs, which limit the IRA investments to mutual funds, bonds and stocks of publicly traded companies,” he said. “Some institutions offer both types. Since self-directed IRAs are no different from traditional IRAs from an income tax perspective, transferring funds from a traditional IRA to a self-directed IRA is simple and tax free.”
He says the problem is that people don’t understand about self-directed IRAs because they think they have to buy stocks or mutual funds, but now they can buy more. “A self-directed IRA makes sense for people who want to invest in non-traditional assets,” he said.
Those assets may include the following:
• Closely-held businesses.
• Land they don’t plan to use in any personal way.
• Community bank stocks or other non-publicly traded stocks.
• Non-publicly traded assets such as private placement equity investments or real estate partnerships.
• Promissory notes, trust deeds or mortgages.
“That opens up a lot of opportunities to invest,” Martin said, “but you can’t buy a piece of real estate for something like a hunting camp. It must be for a business transaction and must be treated as an investment. If you buy a camp, that amount is subject to taxation the year you buy it.”
He adds that an investor whose age is under 59 1/2 who makes a purchase such as a hunting camp is not only subject to ordinary taxation but must also pay a 10% penalty tax.
“There are a lot of great benefits but the rules must be applied,” he said. “It’s complicated and time consuming. It requires research. There are penalties if the rules are not followed.”
His advice for investors is to ask for professional guidance. “Because of the growth in IRAs, people are looking for more information about them. Usually, the IRA is their biggest single asset. With Baby Boomers looking toward retirement, there’s a lot of interest in IRAs. We welcome the opportunity to educate people about them.”
Martin concludes that self-directed IRAs are not for everyone because of the complicated tax rules that come into play with them. “The biggest risk of a self-directed IRA is self dealing,” he said. “According to the IRS, an IRA is supposed to provide for future retirement, not current needs or wishes. That means you are not supposed to benefit from the investment before you start making withdrawals in retirement.”
Contact MBJ contributing Lynn Lofton at firstname.lastname@example.org.