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No IRA Charitable Rollover?

Your IRA May Still Be the Most Tax-Efficient Charitable Gift

Wondering what's the best way to make a charitable gift? Are you thinking about your heirs? What should they receive and what should the charity receive?

Before you make any decisions about making gifts to charity, talk to your financial or legal advisor about designating all or part of your individual retirement account (IRA) to charity.

Here is why:

Using retirement plan assets to fund a charitable bequest is often the most tax-efficient way to become a philanthropist. Retirement plans, including IRAs, 401(k) and 403(b) plans are all funded with pre-taxed dollars. The pre-tax contributions that you make to these accounts are invested until you reach age 59½, at which point you may begin taking distributions without penalty. But, you have to pay income tax on these distributions. Many people wait until they are 70½ before they begin taking "mandatory" distributions to defer their income tax bill. The government wants to capture as much of your deferred tax bill while you are living as it can! What happens to the balance of your retirement plan after you pass away?

The general rule is that money or property received as a result of a bequest or beneficiary designation (pay on death or transfer on death) is not subject to income tax. It may be subject to federal estate tax if the donor has a large enough estate (an estate over $5 million) and it may be subject to state inheritance tax as well. Retirement plans are an exception to this rule because you have not paid tax on what is left in the account. Someone has to pay the income taxes and if you leave to your heirs, they will be very surprised that they have to pay income taxes, possibly up to 60% of the balance of the plan in income and estate taxes to the government!

Luckily, you have a better choice. You can designate all or a portion of your retirement accounts to the charity of your choice and pay NO taxes on this transfer. Charities do not have to pay income tax, estate tax or inheritance tax. Leave other assets that you hold directly such as bank accounts, stocks and bonds, life insurance, real estate and cash to your heirs. Your heirs will be thankful that you passed assets to them without all the tax obligations.

Of course, you can make charitable gifts with the lifetime distributions that you take from your retirement accounts. However, you will have to declare the income and then take the charitable income tax deduction. When the charitable rollover rules were in effect, donors aged 70½ and didn't have to worry about this; they could ask their retirement plan administrator to transfer retirement plan assets directly to the charity. But now, anyone who is charitable, has a retirement plan and is at least 59½ should consult a trusted tax advisor to see how much a lifetime gift from their retirement may "cost" them. It's true, the IRA Charitable Rollover Qualified Charitable Deduction was a good thing, but really only for a very few donors who were older than 70½ and had very large retirement account balances or other sources of income. Now that the law has expired, we are all looking for the best way to make charitable gifts.

Without a doubt, designating a charity for all or part of your pre-tax retirement plan assets after you pass away is often the most tax efficient form of philanthropy. Here's how to get started.


The material presented on this Planned Giving website is not offered as legal or tax advice.
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