Gifts from Retirement Plans During Life

Likely your IRA, 401(k), or other retirement fund is one of your largest assets. If the fund is larger than you and your family will probably need for retirement security, you may have considered using some portion of it for a charitable gift. From a tax standpoint that could be a wise move. The way to structure your gift depends on your age and the type of plan you have.

If you are between 59½ and 70½

You can withdraw money from your retirement fund, whether that is an IRA, 401(k), 403(b), or other comparable plan, and then contribute it to a charity. The money you withdraw will be added to your taxable income, but you will receive a charitable deduction for the same amount. If the amount you are able to deduct on your federal and state tax returns equals the withdrawal, you will make the gift at little or no tax cost. Don’t do this if you are under 59½ because the amount withdrawn would be subject to a 10% penalty tax as well as being added to your taxable income.

If you are over 70½ and have an IRA

You may authorize the administrator of your IRA to transfer funds (roll funds over) directly to one or more charities. The amount you transfer will count towards your mandatory distribution if you have attained the age when mandatory distributions begin. That age was 70½, but the SECURE Act, enacted in December of 2019, raised the age to 72 for persons who had not reached the age of 70½ by 2019. When a donor makes an IRA charitable rollover after the applicable minimum distribution age (70½ or 72 as the case may be), the amount transferred will count towards the minimum distribution requirement—subject to certain adjustments if that donor has been making post-age-70½ contributions to the IRA—and will not be added to taxable income.

If you are over the age of 70½ and have a retirement fund other than an IRA

The direct transfer (“rollover” provision) described above can be done only with an IRA. However, if you have another plan, such as a 401(k) or 403(b), you could transfer money from that plan to an IRA and then do a direct transfer to charity from your IRA. Some people, upon retirement, convert their employer retirement plan to a self-directed IRA anyhow.

So long as your money remains in a plan other than an IRA, you can follow the procedure described above for those younger than 70½: withdraw funds from the plan and then contribute them to the charity, in which case the deduction usually offsets all or most of the tax on the distribution.

If you own some appreciated stock, you might contribute that stock to charity and then withdraw from your retirement plan cash equal in value to the stock. Suppose, for instance, that you contribute stock worth $50,000 with a cost basis of $20,000. Then you withdraw $50,000 from your retirement plan and use that $50,000 to repurchase the stock, stepping up the basis to $50,000 and reducing the taxable gain if you sell the stock in the future. Assuming you are able to use the deduction, it would totally or substantially offset the tax on the amount withdrawn, and the withdrawn amount would count towards your mandatory distribution requirement.

Tips on how your beneficiaries can avoid income tax!

When individuals are named as beneficiaries of retirement funds (other than from a Roth IRA), the distributions are taxed as ordinary income. On the other hand, when those beneficiaries receive bequests of appreciated property—such as securities and real estate—they are not taxed on the gain that accrued before your death. Thus, when a person wants to make end-of-life gifts to both loved ones and a charity, it is more tax-efficient to name the charity as a beneficiary of all or a portion of remaining funds in the retirement account. The charity, being tax-exempt, will pay no income tax on any of the distributions, and your loved one will pay no income tax on the appreciated securities or real estate.

Here is a comparison of the potential tax savings for loved ones in the 37% income-tax bracket, receiving appreciated securities versus retirement-plan assets. In this example the appreciated assets are sold within a year after death (experiencing modest appreciation of about 4%):

Retirement Plan vs. Appreciated Securities:
Which to Loved Ones and Which to Charity?
 

SCENARIO 1:

SCENARIO 2:

Your assets

If you give

If you give

• 

$500,000
appreciated securities

• 

appreciated securities to loved ones

• 

appreciated securities to
charity

• 

$500,000
retirement plan

• 

retirement plan to
charity

• 

retirement plan to
loved ones

Taxes paid by charity

$0.00

$0.00

Net to charity

$500,000

$500,000

Taxes paid by
loved ones*

$0

$175,000
(federal income tax)

Net to gift loved ones

$500,000

$325,000

*35% income-tax bracket

In this example your loved ones get 35% more when you give retirement funds to charity. That’s a clear advantage with inheritance.

How do I change my beneficiary designation?

The procedure is very simple. It is unnecessary to amend your will or living trust agreement. Just request a change-of-beneficiary form from your plan administrator and indicate the percentages for family members and charity.

You can make a gift by beneficiary designation from an IRA, 401(k), 403(b), or any other comparable plan.

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