Gifts From Retirement Plans

Lifetime Gifts

Likely your IRA, 401(k), or other retirement fund is one of your largest assets. If the fund is larger than you and your family will probably need for retirement security, you may have considered using some portion of it for a charitable gift. From a tax standpoint that could be a wise move. The way to structure your gift depends on your age and the type of plan you have.

If you are between 59½ and 70½
You can withdraw money from your retirement fund, whether that is an IRA, 401(k), 403(b), or other comparable plan, and then contribute it to a charity. The money you withdraw will be added to your taxable income, but you will receive a charitable deduction for the same amount. If the amount you are able to deduct on your federal and state tax returns equals the withdrawal, you will make the gift at little or no tax cost. Don’t do this if you are under 59½ because the amount withdrawn would be subject to a 10% penalty tax as well as being added to your taxable income.

If you are over 70½ and have an IRA
You may authorize the administrator of your IRA to transfer funds (roll funds over) directly to one or more charities. The amount you transfer will count towards your mandatory distribution if you have attained the age when mandatory distributions begin. That age was 70½, but the SECURE Act, enacted in December of 2019, raised the age to 72 for persons who had not reached the age of 70½ by 2019. When a donor makes an IRA charitable rollover after the applicable minimum distribution age (70½ or 72 as the case may be), the amount transferred will count towards the minimum distribution requirement—subject to certain adjustments if that donor has been making post-age-70½ contributions to the IRA—and will not be added to taxable income.

If you are over the age of 70½ and have a retirement fund other than an IRA
The direct transfer (“rollover” provision) described above can be done only with an IRA. However, if you have another plan, such as a 401(k) or 403(b), you could transfer money from that plan to an IRA and then do a direct transfer to charity from your IRA. Some people, upon retirement, convert their employer retirement plan to a self-directed IRA anyhow.

So long as your money remains in a plan other than an IRA, you can follow the procedure described above for those younger than 70½: withdraw funds from the plan and then contribute them to the charity, in which case the deduction usually offsets all or most of the tax on the distribution.

If you own some appreciated stock, you might contribute that stock to charity and then withdraw from your retirement plan cash equal in value to the stock. Suppose, for instance, that you contribute stock worth $50,000 with a cost basis of $20,000. Then you withdraw $50,000 from your retirement plan and use that $50,000 to repurchase the stock, stepping up the basis to $50,000 and reducing the taxable gain if you sell the stock in the future. Assuming you are able to use the deduction, it would totally or substantially offset the tax on the amount withdrawn, and the withdrawn amount would count towards your mandatory distribution requirement.

Tips on how your beneficiaries can avoid income tax!
When individuals are named as beneficiaries of retirement funds (other than from a Roth IRA), the distributions are taxed as ordinary income. On the other hand, when those beneficiaries receive bequests of appreciated property—such as securities and real estate—they are not taxed on the gain that accrued before your death. Thus, when a person wants to make end-of-life gifts to both loved ones and a charity, it is more tax-efficient to name the charity as a beneficiary of all or a portion of remaining funds in the retirement account. The charity, being tax-exempt, will pay no income tax on any of the distributions, and your loved one will pay no income tax on the appreciated securities or real estate.

How do I change my beneficiary designation?
The procedure is very simple. It is unnecessary to amend your will or living trust agreement. Just request a change-of-beneficiary form from your plan administrator and indicate the percentages for family members and charity.

You can make a gift by beneficiary designation from an IRA, 401(k), 403(b), or any other comparable plan.

How It Works

1. You take a distribution from your qualified retirement plan or IRA that is includable in your gross income
2. You make a gift of the distribution or of other assets equal in value to the distribution
3. You receive an offsetting charitable deduction

Benefits

• You may draw on perhaps your largest source of assets, with no adverse tax consequences, to support the programs that are important to you at Catholic Charities
• The distribution offsets your minimum required distribution
• If you use appreciated securities instead of cash from your distribution to make your gift, you’ll avoid the capital-gain tax on the appreciation

 

Gifts From Retirement Plans at Death

Retirement-plan benefits often make an excellent choice for funding a testamentary charitable gift to Catholic Charities. Not only will such a gift escape federal income tax, but it will also avoid any potential federal estate tax. This combination of income taxes and estate taxes could result in a tax hit of more than 62% of the retirement-plan benefits.

If, for example, you have designated your children to be the beneficiaries of $100,000 of your retirement-plan benefits, and your estate is subject to federal estate taxes, your children could lose $40,000 to federal estate taxes and as much as an additional $22,200 to federal income taxes for a total reduction in benefits of $62,200. If, however, you designate Catholic Charities as the beneficiary of that $100,000, the full amount will pass to us with no reduction in benefits.

How It Works

1. You name Catholic Charities as beneficiary for part or all of your retirement-plan benefits
2. Funds are transferred by plan administrator at your death

Benefits

• No federal income tax is due on the funds that pass to Catholic Charities
• No federal estate tax on the funds
• You make a significant gift for the programs you support at Catholic Charities

 

Qualified Charitable Distribution (QCD) or “IRA Rollover” Gifts for Donors Aged 70½ or Older

The Protecting Americans from Tax Hikes (PATH) Act of 2015 made permanent the qualified charitable distribution provision, which is popularly known as the IRA charitable rollover.

Benefits of the IRA charitable rollover

• The gift is very simple to arrange.
• The amount transferred from an IRA to charity is not added to taxable income.
• The amount transferred counts towards the minimum required distribution. The required beginning date for distributions from an IRA was the age of 70½, but the SECURE Act, enacted in December of 2019, raised that age to 72 for persons who had not reached the age of 70½ by 2019. When a donor makes an IRA charitable rollover after the applicable required minimum distribution age, the amount transferred is a qualified charitable distribution and will count towards the minimum distribution requirement, subject to certain adjustments if that donor has been making post-age-70½ contributions to the IRA.

Requirements and restrictions for making an IRA charitable rollover gift:

• The donor must be 70½ or older.
• The gift must be made directly from the IRA to an eligible charitable organization.
• Gifts to all charities combined cannot exceed a total of $100,000 per taxpayer for the year.
• The gifts must be outright, and no material benefits can be received in return for the gifts. Thus a transfer for a gift annuity, charitable remainder trust, or pooled income fund is not permitted.
• Gifts cannot be made to a donor advised fund, supporting organization, or private foundation.
• The gift is not included in taxable income, and no charitable deduction is allowed.
• The gift can be made only from an IRA. Gifts from 401(k), 403(b), and 457 plans are not permitted.

An IRA rollover may be the right gift for you to make if:

• You want to make a charitable gift and your IRA constitutes the largest share of your available assets.
• You are required to take a minimum distribution from your IRA, but you do not need additional income.
• You do not itemize your deductions. In that case, a personal IRA distribution increases your taxable income without the benefit of an offsetting deduction. An IRA charitable rollover will not be included in your taxable income even if you do not itemize other deductions.
• You live in a state where retirement-plan distributions are taxable on your state income-tax return, but your state does not allow itemized charitable deductions.
• You would like to make an additional charitable gift, but it would not be deductible because of the annual limitation of 60 percent of adjusted gross income for charitable contributions. The IRA charitable rollover is equivalent to a deduction because it is not included in taxable income.
• You have an outstanding pledge to a charity. The IRA charitable rollover can satisfy a pledge without violating rules against self-dealing.

Here are the steps to take to make a gift:

• If you want to make a qualifying transfer, contact your IRA administrator and instruct that person to transfer funds to the charity(ies) you designate.
• Contact our office. We will answer your questions and provide instructions for completing your gift.

 

How It Works

1. You are 70½ or older and instruct your plan administrator to make a direct transfer of up to $100,000 to Catholic Charities
2. Plan administrator makes transfer as directed to Catholic Charities

Benefits

• Your gift is transferred directly to Catholic Charities; since you do not receive the funds, they are not included in your gross income*
• Your gift will count towards your minimum distribution requirement, which, under the 2019 SECURE Act, begins at the age of 72
• You support the programs that are important to you at Catholic Charities

 

*No income-tax deduction is allowed for the transfer.