Qualified retirement plans are IRS-approved retirement accounts in which income accumulates, tax-deferred, over time. These types of accounts remain the leading form of a retirement account because they allow individuals to grow their pre-tax contributions over the course of their working career. Common examples of these accounts include non-Roth IRAs, employer-sponsored 401(k)s, profit-sharing plans, and public sector 403(b) plans, as well as other tax-deferred plans.
Rather than administering your retirement account as part of your estate and making a specific bequest in the form of a cash gift to the organization, you can name the organization as a direct beneficiary of your retirement account. By naming the organization as a direct beneficiary, you will notice a double tax benefit. First, your estate will not be required to pay federal estate taxes, if the value of your estate is greater than the federal estate tax exemption, because the retirement account will receive a charitable deduction. Second, charitable organizations are tax exempt, meaning that the organization is not required to pay federal or state income taxes on the gift it receives. The organization will receive the entire balance of the account, making the most of your gift.
Another tax benefit to consider arises if you intend to give part of your estate to charity and part of your estate to individual beneficiaries. When an individual beneficiary, such as a child, receives your qualified retirement account, the IRS requires the individual to pay income taxes on the distribution. Therefore, the individual would not receive the full retirement account value. In this circumstance, you should consider leaving these individuals the remaining non-qualified accounts from your estate, such as post-tax investment accounts, Roth IRAs and common stocks. By gifting qualified accounts to a charitable organization and gifting non-qualified accounts to individual beneficiaries, you will maximize the amount you leave to all beneficiaries. Being mindful about your beneficiary designations allows you the opportunity to minimize tax payments and to make the most of your legacy gift.
If you plan to leave a percentage of a qualified retirement account to a charitable organization and the remainder to a noncharitable beneficiary, you should be aware of impacts to required minimum distributions of your beneficiaries. The timeline for the required minimum distribution for the noncharitable beneficiary may be accelerated and the individual would not be able to take the required distributions over their life expectancy. You should be on the lookout for associated tax implications before finalizing your estate plan.
An estate planning attorney, such as the skilled attorneys at Anderson O’Brien, can offer guidance as you consider a charitable gift as part of your legacy to leave a lasting impact on your community or a charitable cause that is meaningful to you.