The Benefits of Making Charitable Gifts and Bequests from Your IRA

 In Charitable Giving, Retirement Plans

Photo by “My Life Through A Lens” on Unsplash

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 Retirement plans, of course, are taxed when the funds are withdrawn.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, you have a number of options for giving away retirement plan assets that can minimize your taxes while supporting charities whose missions are important to you.

As Part of Your Estate Plan

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 what would happen if you left the same assets to your children or other individual heirs since they would be taxed on their withdrawals from the funds. 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 out for a period of time after your death. 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.

During Your Life

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. Doing so can satisfy their annual minimum required distribution. 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 — and fewer people do today due to the increase in the standard deduction — you will have to 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:

  • 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 ($200,000 for a married couple filing jointly).

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 while contributing to the charities you value.

Related Articles:

When You May Want Retirement Plans to be Payable to Trusts

Treatment of Inherited IRAs

The Basic Rules of Retirement Plans Before and After the SECURE Act

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