Many Americans have taken advantage of tax incentives provided by Congress to
encourage saving for retirement through contributions to Individual Retirement
Accounts (IRAs), 401(k)s and similar plans.
In addition to income tax savings at the time contributions are made to such
plans, the assets in the plans build tax free over time for future enjoyment.
Amounts held in tax-favored retirement plans are typically not subject to
income tax until they are actually withdrawn from the plan by the plan owner or
surviving heirs. Retirement Plan Estate Gifts May Avoid Double Taxation
You may want to consider including charitable gifts as part of your plans for
the future distribution of any balances remaining in your retirement plans at the
end of your lifetime. Because they are included as part of one’s estate at
death, the assets in tax-favored retirement plans can be subject to federal
and/or state estate taxes.
In addition, when heirs receive the balance of retirement plans after payment
of estate taxes of up to 40%, income tax may also be due on net amounts
received —39.6% or more—depending on state income taxes and other factors. The
combination of income and estate taxes that could eventually be levied on
retirement accounts may, in some cases, amount to a large portion of an
Rather than having retirement assets be reduced by a possible combination of estate
and income taxes, you can direct that such assets be used to fund charitable
gifts from your estate. This can actually result in more assets being received
by loved ones than if retirement assets were left to family and charitable
gifts were made from other funds.
Making Gifts Today
You may also find that your retirement plan can also at times be a convenient
“pocket” from which to make charitable gifts to Baron Jay Foundation this year.
If you are over the age of 59½, and can make withdrawals from your traditional
IRA or other tax-favored retirement plan without triggering an early withdrawal
penalty, you may wish to make withdrawals from retirement plans in amounts
sufficient to fund all or a portion of your charitable gifts.
Although you may be required to report the income on your tax return, when you
itemize your deductions, you could take a corresponding charitable deduction
for your gift.
If you are able to deduct the full amount of the gift/withdrawal, this can
often result in a “wash” for federal tax purposes and ensure these funds will,
in effect, never be subject to gift, income, or estate taxes. Even taxpayers in
the highest income tax brackets where itemized deductions may be limited can
find this strategy attractive.
Special Tax-Free IRA Gifts
Those aged 70 ½ or older may wish to take advantage of an additional tax
benefit by choosing to make their gifts using funds from a traditional or Roth
It is possible to make charitable gifts directly from IRAs to qualified
charities annually in a total amount up to $100,000 free from federal income
taxation. The income tax laws of most states allow tax-free treatment as well.
Check with your tax advisor.
This provision applies only to IRAs and not to 401(k)s, 403(b)s and other
tax-favored retirement plans. Gifts must be made directly to a qualified
charity and may not be made to donor advised funds, private foundations or
supporting organizations or to fund trusts and similar life income gift