by Roger R. Yergeau
During your lifetime, you can support a charity with volunteer hours or donations. Donations to the charity you want to support may be limited, however, due to the constraints of your budget and worries about outliving your lifetime savings, especially given our increased life spans. An important option to explore is using a traditional Individual Retirement Account to support charities about which you care.
Over the past several decades, the use of IRAs for retirement savings has increased substantially. Upon leaving the workforce, many people use IRA rollover accounts to protect the savings they have accumulated through their 401K plans and other tax- favored retirement saving vehicles while working in corporations, schools, hospitals and many nonprofit associations. IRAs are also used by the self-employed to accumulate retirement savings and to reduce current income taxes. The traditional IRA is not taxed during the accumulation phase and all investment earnings are not taxed prior to distribution.
When a traditional IRA holder starts distribution after age 59 ½, the distribution is added to the taxpayer”™s total income and taxed in the year received. The IRS requires an IRA account holder to take distribution after age 70 ½ under the minimum required distribution regulations.
Even after taking minimum required distributions, an IRA holder may face several tax hurdles in leaving the accumulated IRA to heirs. When doing estate planning, one should keep in mind that IRAs can be a tax burden to the heirs of the IRA holder and are an opportunity to leave a legacy for one or more charities that have had a special place in the IRA holder”™s life.
Making a charity a beneficiary of an IRA is usually a simple process. The IRA holder requests a beneficiary designation form from the custodian/trustee. The IRA holder can name multiple beneficiaries including a combination of individuals and charities.
Undecided about which charity to designate when you have strong feelings for more than one charity? Name multiple charities as the beneficiary. However, it is best to specify a specific percentage to each charity when naming more than one beneficiary of the IRA. When naming a charity as beneficiary, contact the charity to determine the legal name of the organization to avoid confusion at a later date.
Why does a person want to leave an IRA to a charity at death?
A gift of an IRA at death to a charity is not taxed for federal estate tax purposes and qualifies for a federal estate tax deduction. The taxpayer”™s estate is not taxed for income taxes when leaving the IRA directly to the charity. Most importantly, the charity is not taxed on the proceeds when received. Thus 100 percent of IRA proceeds can be used for the mission of the charitable institution.
Could an IRA account holder make a gift during their lifetime using the IRA? Yes, but it may not be effective from a tax standpoint.
If a person is under 59 ½ there is the 10 percent penalty for an early distribution. If you do not itemize deductions, your gift will not allow you to receive a charitable gift deduction. Some states do not allow for a charitable gift deduction in their state income tax law. Charitable gifts are limited to 50 percent of the taxpayer”™s adjusted gross income. For example, if you made a $100,000 distribution from the IRA account and your AGI is $100,000, your maximum charitable deduction would be $50,000.
The one exception for a gift from an IRA during one”™s lifetime is the IRA Charitable Rollover. Originally enacted in 2006, this allowed taxpayers over age 70 ½ to make a qualified distribution to a charity from the IRA up to $100,000 per year. The distribution from the IRA has to be paid directly from the custodian/trustee of the IRA to the charity. The taxpayer cannot receive any of the distribution. The IRA Charitable Rollover can be used to satisfy all or portions of the IRA account holder”™s minimum required distribution withdrawal.
One word of caution: the IRA Charitable Rollover provision in the tax law expired on Dec. 31, 2013. In 2014, it was passed very late in December for only the 2014 tax year. Many taxpayers could not take advantage of the IRA Charitable Rollover provision because of the late enactment and the tight requirements taxpayers needed to satisfy.
Many tax professionals believe Congress will again reinstate the rollover provision in 2015, possibly on a permanent basis. While this looks favorable, if you are an IRA holder over age 70 ½ and are interested in making a distribution during your lifetime, stay in touch with your tax professionals to see if Congress passes the extension.
IRA distributions to a charity are a great tool in planning your estate. You can benefit a charity important to you during your lifetime while preserving the funds you yourself need on a day to day basis in life.
Consult your estate planner and tax professional when planning an IRA gift to a charity to maximize all the estate benefits, avoid complications and have your charity receive the maximum amount of your IRA gift.
Roger R. Yergeau is a retired principal partner of Agent Support Group and serves as volunteer director of planned giving for the nonprofit Open Door Foundation in Ossining. He can be reached at Open Door Foundation at ryergeau@odfmc.org.
