The Benefits of Making Charitable Gifts and Bequests from Your IRA

 In Charitable Giving, Retirement Plans

Charities often encourage donors to make gifts of retirement plans due to the tax benefits of doing so. Retirement plans, of course, are taxed when the funds are withdrawn. But, non-profit organizations don’t pay taxes on their income. As a result, if you leave an IRA or other retirement plan to a charity, it will get full advantage of your generosity without paying taxes on the funds, unlike what you leave to your children or other individual heirs. So, if you plan to make a charitable bequest, you may want to name the charity as a beneficiary of your retirement plan, leaving non-taxable funds to your other heirs. However, if you are using a trust, beware splitting any of your retirement accounts with your individual beneficiaries because they may then lose their opportunity to stretch their distributions throughout their lifetimes. Instead, designate any retirement funds going to charities directly to them and have other plans payable to your trust for your family or other beneficiaries.

The IRS also permits taxpayers over age 70 ½ to give up to $100,000 of retirement funds annually directly to charities without realizing any income on the transfer. This provision helps people who don’t itemize their deductions. If you do itemize, if you withdraw money from your retirement account and then contribute it to charity, you will have an offsetting deduction for the income you received on your IRA withdrawal. But if you don’t itemize, you will have pay tax on the withdrawal without the benefit of the offsetting charitable deduction.

Here are the ground rules to take advantage of this option to do a charitable rollover as authorized pursuant to the PATH Act of 2015:

  • You have to be over 70 1/2.
  • The contribution must come from an IRA or Roth IRA, not from a 401(k), simple IRA or 403(b) plan.
  • The contribution must be to a public charity, including churches and foundations, not to a donor advised fund.
  • You cannot receive the IRA distribution yourself; it has to go directly to the charity.
  • You are limited to $100,000 a year.

If you want to take advantage of this option, contact your IRA sponsor and the charity you want to receive the distribution to coordinate the rollover.Of course, the higher your tax bracket, the more useful this will be. And if you’re fortunate enough to not need your required minimum distributions for your living expenses, this can help you avoid being forced to pay taxes on funds you’d prefer to leave in your retirement plan.

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