Donating Your IRA or 401(k) to Charity
As the personal wealth of Americans has grown dramatically over the past decade,* (see below) it seems to have sparked philanthropic thoughts among those contemplating retirement. If you’re among those who believe they have more than enough funds for retirement and, as a result, would like to donate your Individual Retirement Account (IRA) or 401 (k) monies to a charity, you should be aware that your generosity will have tax implications.
Under current law, such donations must be declared as withdrawn income and then they can be claimed as charitable contributions. That, of course, means you would need to itemize deductions in order to benefit from any donation and, in turn, those deductions would be limited to 50% of your adjusted gross income (AGI). Furthermore, for tax year 2002, itemized deductions begin to phase out for most individuals with AGIs of $137,300 or more.
In recent years, Congress has repeatedly considered adopting proposals to provide more favorable tax treatment to charitable giving from retirement accounts. But, it has delayed doing so, as it studies the projected loss of more than $2 billion in revenues versus the cost of government subsides that would be reduced or eliminated to those same charities because of those gifts. (Legislative bill S.1924, which is currently before Congress, is the latest proposal that would simplify the making of such gifts.)
Reduce Your Estate Tax
If you’re looking to reduce taxes at your death, naming a qualified charity as your beneficiary means – if your estate is large enough to trigger federal estate taxes – your charitable gift will reduce your estate tax liability by any portion of your estate you leave to charity.
There is, however, a potential drawback to naming a charity as a primary beneficiary of your IRA. Once you reach 70 ½, you may have to take larger required minimum distributions (RMDs) than you would like. That’s because a charity is a corporate entity with no life expectancy. As a result, you’ll be required to base the distribution on your single-life expectancy.
401(k) Needs Spousal Approval
If the charitable donation involves a 401(k) and you’re married, naming a charity as your plan’s beneficiary would require your spouse to sign a waiver giving up his or her rights to the money. That’s because federal law gives spouses beneficiary priority over other beneficiaries. If you roll over your 401(k) into an IRA, however, you’ll have an easier time naming a charity as a beneficiary. In fact, by setting up separate accounts for your IRA, you could leave different amounts of money to different heirs or charities.
Given the legal and financial variables involved in making this type of charitable contribution, anyone contemplating doing so, should seek professional advice.
Under current law, such donations must be declared as withdrawn income and then they can be claimed as charitable contributions. That, of course, means you would need to itemize deductions in order to benefit from any donation and, in turn, those deductions would be limited to 50% of your adjusted gross income (AGI). Furthermore, for tax year 2002, itemized deductions begin to phase out for most individuals with AGIs of $137,300 or more.
In recent years, Congress has repeatedly considered adopting proposals to provide more favorable tax treatment to charitable giving from retirement accounts. But, it has delayed doing so, as it studies the projected loss of more than $2 billion in revenues versus the cost of government subsides that would be reduced or eliminated to those same charities because of those gifts. (Legislative bill S.1924, which is currently before Congress, is the latest proposal that would simplify the making of such gifts.)
Reduce Your Estate Tax
If you’re looking to reduce taxes at your death, naming a qualified charity as your beneficiary means – if your estate is large enough to trigger federal estate taxes – your charitable gift will reduce your estate tax liability by any portion of your estate you leave to charity.
There is, however, a potential drawback to naming a charity as a primary beneficiary of your IRA. Once you reach 70 ½, you may have to take larger required minimum distributions (RMDs) than you would like. That’s because a charity is a corporate entity with no life expectancy. As a result, you’ll be required to base the distribution on your single-life expectancy.
401(k) Needs Spousal Approval
If the charitable donation involves a 401(k) and you’re married, naming a charity as your plan’s beneficiary would require your spouse to sign a waiver giving up his or her rights to the money. That’s because federal law gives spouses beneficiary priority over other beneficiaries. If you roll over your 401(k) into an IRA, however, you’ll have an easier time naming a charity as a beneficiary. In fact, by setting up separate accounts for your IRA, you could leave different amounts of money to different heirs or charities.
Given the legal and financial variables involved in making this type of charitable contribution, anyone contemplating doing so, should seek professional advice.
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, contact us today!
*Accordance to the Joint Committee of Taxation, Americans currently having more than $1 trillion in IRAs, and five times that amount in defined contribution accounts that can be rolled into IRAs. (Source: National Committee on Planned Giving, White Paper: IRA Rollover for Charitable Purposes, 2002.)