Gifts of Retirement Plan Assets

Like many Americans, you are probably aware that the accumulation of assets in your retirement plan is the basis for a financially secure future. To preserve your retirement assets after your lifetime, consider the benefits of using them in a totally different way.

Retirement accounts are often exposed to income taxes and estate taxes, at a combined marginal rate that could rise to 65 percent or even higher on large, taxable estates. Yet many of these taxes can be avoided or reduced through a carefully planned charitable gift.

Other considerations come into play when deciding on using retirement plan assets for charitable giving. Your account can pass directly to a charitable organization as your primary beneficiary, or it can be transferred to a deferred giving arrangement that will pay an income for life to a family member, after which the remaining assets pass to the organization. You might even consider a deferred gift that is designed to pay a life income to yourself.

How Retirement Accounts Are Taxed

Qualified retirement plans are those that receive favorable income tax treatment during an employee’s lifetime. No income tax is due on the funds as contributed, and no income tax is due on the earnings and appreciation while in the plan. You pay taxes on the funds only when you receive them.

Generally, the undistributed balance of qualified retirement plans is fully includable in your gross estate tax purposes. Since the funds in retirement accounts usually represent deferred compensation that has not been subject to income tax, giving the accounts to individual heirs exposes the funds to income taxes. Your retirement dollars can be seriously depleted by the double taxation.

A qualified retirement plan often makes a large, taxable distribution shortly after an employee’s death. As a general rule, qualified plans other than IRAs will specify how quickly distributions must be made from the plan. In the case of an IRA, if the owner dies before reaching the required beginning date, the plan benefits must generally be distributed within five years, but a designated beneficiary may stretch the distribution over his or her life or life expectancy. If the owner dies after the required beginning date, then the entire balance can be distributed over the length of what would have been the deceased owner’s remaining life expectancy or the designated beneficiary’s remaining life expectancy. Only a surviving spouse can roll over an inherited distribution to his or her own IRA and benefit from further income tax deferral; all other beneficiaries are taxed according to the above rules.

By donating retirement assets, those funds avoid estate taxes, and you can be certain that 100 percent of the balance of your retirement funds will support your philanthropic objectives.

How to Donate Your Retirement Account

The simplest way to leave the balance of a retirement account to the Foundation after your lifetime is to list us as the beneficiary on the beneficiary form provided by your plan administrator. Never make a beneficiary change, however, before discussing your desires with your professional advisor. For an IRA or Keogh plan, you administer personally, notify the custodian in writing and keep a copy with your valuable papers.

If you are married, your surviving spouse is entitled by law to receive the entire amount in these qualified plans: money purchase pension, profit-sharing plan, 401(k) plan, stock bonus plan, ESOP or any defined benefit or annuity plan (though not an IRA). In order for the assets to be transferable to the Sedalia School District Foundation, your spouse must execute a written waiver (even though you may designate a charitable organization as beneficiary on your employer’s forms). Your spouse can execute one after your death, if necessary. In that case, the document must also include a qualified disclaimer.

If you prefer to make your spouse the primary beneficiary of the retirement account, you can name the Sedalia School District Foundation as the secondary beneficiary.

Perhaps you want your children to benefit from your retirement account, too. In that case, you might designate a specific amount to be paid to the Foundation, before the division of the rest of the money to your children.