Traditional Individual Retirement Accounts (IRA) are funded with pre-tax dollars making them very tax inefficient to use during life and to pass on to individuals upon death. Here are two options that minimize tax consequences while allowing IRA owners to benefit charities during their lifetime and at death.
Many people who don’t need their IRA distributions to live on struggle with the tax consequences of having to take their Required Minimum Distribution (RMD) at age 72 because any distribution is taxed as income.
These adverse tax consequences have IRA owners trying to figure out ways to get money out of their IRAs while minimizing tax consequences. Many utilize a Qualified Charitable Distribution (QCD). This is available to you as long as you are 70 ½ years of age or older even though you are not in Required Minimum Distribution status until age 72.
If you fall into this category you can give up to $100,000 per year directly from your IRA to charity or multiple charities. Any amount given using this method will be excluded from income. Using a QCD does not prohibit you from also taking money out for your own needs.
The QCD needs to go directly from your IRA custodian to the charity. The amount to charity just cannot be greater than $100,000. To accomplish this you need to work directly with your IRA custodian. Unfortunately this option is available only for distributions from an IRA but not other qualified plans.
When someone who is not a spouse inherits an IRA they have to take the money out of the IRA within 10 years. Any money taken out of an IRA is taxable as income to the inherited IRA owner.
To avoid this many IRA owners choose to name a charity or multiple charities as a beneficiary of their IRA. To make a future gift of an IRA or Retirement Plan simply name the charity as a primary or contingent beneficiary for 100% or a portion of the IRA.
Because it is a future gift the donor is not entitled to an income tax charitable deduction at the time of naming a charity as a beneficiary. The amount given to charity is not included in the IRA owner’s estate for estate tax purposes.
A very simple example is a follows: If someone passes away with an estate of $4 million but leaves $1 million of their IRA or other qualified plan assets to a charity, their taxable estate is now $3 million.
In Minnesota, the estate tax exclusion amount is $3 million in 2020, therefore the decedent would not have a taxable estate in Minnesota.
Whatever your situation, be sure to consult with your attorney and tax advisor for details on how best you can benefit charities now and long into the future, and find out if your IRA is the right vehicle to do that.
Want to learn more about planned giving? Visit our website to see if it's right for you.
Written by Lori Greenway, Vice President/Fiduciary Advisory Specialist, Wells Fargo and United Way Planned Giving Committee Member