transfering $ from 401 plan to charitable organization

[Guest AHollister]

Can a person make a donation to a charitable organization, more specifically a church, by transfering money from their 401k plan without being charged penalties or taxed?

[Guest Harry O]

No. The employee includes the distribution in income but then can deduct the amount contributed to the charity. The problem is that the full amount of the distribution may not be deductible. First, the increase in adjusted gross income attributable to the distribution will cause a phaseout of itemized deductions (if the AGI exceeds certain limits). Second, if the distribution / contribution is large enough, you need to be concerned with the limit on charitable deductions (generally, 50% of AGI if I recall correctly). Finally, the distribution will be subject to the Section 72(t) early distribution penalty unless an exception applies (e.g., the employee has terminated and is over age 55).

Recent tax bills have contained some provisions that would make this type of transaction more attractive but they have not yet found their way into law.