Retirement Plans and Charitable Giving
Retirement plans can present tax-smart charitable giving opportunities both (1) during a donor’s lifetime, as well as (2) in the donor’s estate plans.
1. Charitable Giving Opportunity with an IRA During a Donor’s Lifetime—Available for Those 70½ and Older
The Charitable IRA Rollover is a way for donors age 70 ½ and older to pay less tax while supporting their favorite charities. A Charitable IRA Rollover allows donors to direct up to $100,000 (or less if they choose) from their traditional IRA to charity, tax-free.
The Charitable IRA Rollover creates an opportunity for donors to establish an endowment or make an outright charitable gift to a charitable organization. Your rollover can be directed for a capital campaign gift, current needs, or restricted for endowment purposes. Your gift can be earmarked for your synagogue, a local Jewish agency, Jewish education, or any program or organization that is important to you.
Note, although under current tax laws the RMD (Required Minimum Distribution) does not begin until age 72, you can begin using the IRA Charitable Rollover in the year you turn 70 1/2. In addition, donor advised funds do not qualify for the IRA Charitable Rollover.
This strategy may be right for you if:
You want to make a qualified charitable gift from your IRA to reduce the value of future distributions you will be required to take
You do not itemize your deductions and would like to realize an increased tax benefit for your giving
You wish to make an impactful gift to benefit the community
You already contribute to charity at your deduction limit, and you want to donate more
You do not need your Required Minimum Distribution—all it does is raise your tax liability
You have a secondary smaller IRA you do not need
You wish to remove up to reduce your IRA and remove from your taxable estate
Please consult your professional advisor concerning your tax plans.
2. Retirement Plans as Part of Your Estate Plan
Retirement plans such as IRAS/401Ks/403bs are tax-plagued assets when they are left to a non-spouse beneficiary
Under the Secure Act, a non-spouse beneficiary of an IRA/401K/403B must withdraw the entire amount of the inherited retirement within 10 years –non-spouse beneficiaries are no longer permitted to “stretch” the withdrawals over their lifetime. For example, Mr. Cohen passes away (assume Mrs. Cohen predeceased him) and his 2 sons are the named beneficiaries of his $150,000 IRA. The sons will need to withdraw the entire $150,000 within 10 years, which means paying about $50,000 in income tax. That $150,000 asset, when left to the Cohen sons, will only be worth about $50,000. A $1,500,000 IRA? The sons will need to withdraw it within 10 years and pay about $500,000 in taxes!
Tax smart solution
If Mr. Cohen had named a charity as the beneficiary of the IRA, at Mr. Cohen’s passing, the charity would have received the entire IRA, tax-free. Mr. Cohen could then leave his other, tax-free assets to his sons.
Differences between retirement plan gifts to charity during lifetime vs. in donor’s estate plan
| During Lifetime | In Estate Plan |
|---|---|
| IRA Only (Not from 401K/403B)* | IRA/401K/403B okay |
| Maximum $100,000 per year | No Maximum |
| Any U.S.-based public charity (but not to donor advised fund) | Any U.S.-based public charity (including donor advised fund) |
| Not subject to income tax | Not subject to income or estate tax |
| Accomplished via rollover/distribution from IRA directly to charity | Accomplished by naming charity as designated beneficiary for all or part of the retirement plan |
| Contact plan administrator for rollover paperwork | Contact plan administrator for proper beneficiary designation form |
| Must be 70½ or older | Can designate at any time but charity will only benefit at your passing |
*Want to take advantage of the IRA Charitable Rollover but only have a 401K/403B rather than an IRA? See if you can roll your 401K/403B into a qualified IRA—note, you will need to do this the year prior to making an IRA Charitable Rollover. In addition, if you are still working and contributing to your retirement plan, this may reduce the amount that can qualify for an IRA Charitable Rollover.