Giving Through Retirement Plans
Making Retirement Plan Gifts Now
If you are age 59½ or older, you may be able to make immediate gifts using funds from your IRA or similar retirement plan that may result in little or no tax on the amounts given. For those who itemize their deductions, you can report the amount withdrawn from your account and then take an offsetting charitable deduction. Check with your tax advisors for the specifics of your situation.
Qualified Charitable Distributions
Tax-free IRA gifts, called qualified charitable distributions (QCDs), have special appeal for those who are over the age of 70½. Up to $100,000 per year ($200,000 per couple with separate IRAs) can be given in this manner. Even those who don’t need to take minimum required distributions until age 72 may still make QCDs from their IRAs and not pay income tax on those amounts.
On Your Tax Return
If you have made QCDs to your favorite charity this year, there are steps to follow when filing your tax return next April:
- You will receive a 1099-R that shows your 2022 distribution. This is the amount you will enter on line 4a of your 1040 or 1040SR.
- On line 4b, subtract the total amount of your QCDs and fill in the remainder (even if $0) and write “QCD” next to that amount. (For those who file electronically, there will be an option to select “QCD.”
For specific questions, check with your advisor.
Beneficiary Designations in Estate Planning
A will and perhaps a revocable living trust are important tools when it comes to estate planning. However, a large part of a person’s estate may pass through beneficiary designations from life insurance policies, retirement accounts and other arrangements. It is important to carefully consider who best to receive these assets.
- Understand the basics. You can name beneficiaries for a broad range of assets, including retirement plans, annuities and financial accounts. When you designate a beneficiary, those assets will pass directly to that individual or charitable organization; they will not need to go through the probate process. Generally, if you fail to name a beneficiary, your assets will pass either according to your will, living trust or according to state law if you have no will or trust.
- Don’t forget to review. Beneficiary designations will override bequests directed in your will, so it’s crucial to review your beneficiary designations on a regular basis.
- Consider the tax consequences. It’s wise to get professional advice when naming beneficiaries because some assets, especially retirement accounts, create income tax burdens for heirs. Those who own IRAs and other retirement accounts are often surprised to learn a large percentage of their accounts may be lost to estate and income taxes upon death, leaving little remaining for their heirs. Instead, you can leave all or a portion of an IRA to charity and leave other assets to your loved ones. Simply contact the administrator of your IRA for a change of beneficiary form.
Q. Can I save taxes by leaving retirement assets to charity?
A. Yes. Funds that are remaining in retirement accounts after your lifetime are considered part of your estate and could possibly be subject to state and/or federal estate taxes in addition to income taxes.
For most people, any retirement funds left to heirs will be subject to income tax when received. You may wish to designate that charitable gifts be made from remaining retirement funds and leave other assets to loved ones. This will ensure no income tax will ever be due on any residual retirement fund balances.