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Gifting Retirement Accounts

Most of us know that contributing to your traditional Individual Retirement Account (IRA) avoids paying income tax on the contribution in the year contributed. However, money must come out sooner or later, either in your lifetime or after. There are few benefits that you need to be aware of.

1. If you are over 70½ and are required to take a Required Minimum Distribution (RMD), you should consider making your charitable contributions directly from your IRA rather than taking the distribution first and then making your contributions.

If you do not have other deductions for the year, you will probably claim the new $12,000 standard deduction on your income tax return, and you will not receive the tax benefit of your charitable contributions. But, if you have your IRA administrator make the contribution directly to your church or charity, then the amount contributed will not be included in your taxable income, effectively giving you a deduction for your charitable gifts in addition to your $12,000 standard deduction.

By way of example, Susan, age 71, has a $50,000 taxable income that includes a RMD of $11,000. She takes the standard deduction because she does not have enough other deductible expenses. Susan makes a $5,000 gift to her church and would like to deduct it on her income tax return. Because she takes the $12,000 standard deduction, she cannot. However, if the $5,000 gift is made directly from of her IRA, she will report taxable RMD of only $6,000 rather than $11,000, because $5,000 went to her church. At her tax rate she will save approximately $1,200 in Federal and State income tax.

Even if you do itemize your deductions, gifting from your IRA can still save income taxes by reducing your reported Adjusted Gross Income.

2. Anyone bequeathing to your church or charity a portion of your IRA or other qualified retirement account will avoid paying any income tax on the distribution. However, if your child receives the distribution, he or she may pay up to 50% of it in income tax, thereby losing half to the government. But if given to your church or charity no income tax will be paid, so your church or charity will keep 100%.

3. Distributions on death should be made directly to individuals and not to your estate or to a trust, unless the Trust is specially designed. An IRA or other qualified account given to an individual allows withdrawals over the individual’s lifetime, whereas distributions to the decedent’s estate or a normal trust requires the entire fund be withdrawn within the first five years.

4. However, bequests to a specially designed Trust will allow the funds to continue to grow from earnings on deferred taxes, while protecting the fund from unwise withdrawals by an immature beneficiary.

There are other benefits to an IRA such as avoiding bankruptcy, not being counted for Medi-Cal qualifications, etc. Let us know if we can be of assistance to you.

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