21 June 2016

Charitable Giving with Retirement Assets

Retirement assets present unique opportunities to maximize the impact of your charitable gifting, both during your life and after your death. Many retirement assets contain pre-tax dollars, such as 401(k)s, IRAs and tax-deferred annuities, or other deferred compensation plans. Thus, when you withdraw money from a retirement account, you must pay income tax on that withdrawal at the ordinary tax rate, not the sometimes lower capital gains rate. In addition, a beneficiary who inherits such a retirement account would owe income tax on any money withdrawn from that account. While taxable income does not generally include inherited assets, retirement accounts funded by pre-tax dollars present an exception to this rule.

How does this impact your charitable giving? If you wish to support a favorite charity after your death, consider naming that charity as a beneficiary of your retirement asset, either directly with the account custodian or through your will or trust. In this way, neither your estate nor the charity would pay income taxes on the retirement funds. By directing taxable retirement funds to a charitable organization, you maximize the impact of your estate by minimizing the income tax liability for your other beneficiaries.

For donors over the age of 70½, another popular tool for contributing retirement assets during your lifetime is the Qualified Charitable IRA Distribution. You may distribute up to $100,000 directly from your IRA to a public charity. Any such distribution counts towards your required minimum distribution for that year, but the distribution is not included in your income. Alternately, you could simply withdraw the funds, donate to the charity, and claim a charitable deduction, which would have the same tax consequence. However, if you distribute directly to the charity, the amount of the distribution is not counted in your adjusted gross income. A lower adjusted gross income can help avoid certain adverse tax effects, such as increased taxability of Social Security benefits, decreased deductibility of medical benefits, increased Medicare premiums, and others.

Are you interested in learning more about how you can utilize planned giving to support your favorite charities? Please contact the author or another member of the firm’s estate planning group.