Giving Away Your IRA

“Giving Away Your IRA”



One of the best ways to accumulate wealth continues to be investing in retirement plans such as IRAs and 401(k)s.  After all, you receive an immediate deduction for your contribution based on your highest marginal tax bracket and your money grows tax free, in many cases for decades,  In fact, retirement plan investing will, in many cases, accelerate your net worth by 50% or more over a similar personal investment program. 


However, once you are retired, retirement plans often become one of your least favored holdings for a number of reasons.  At retirement, any withdrawals are subject to income taxes.  By using strategic tax planning, you may be able to lessen the tax effect but you must pay close attention to all the details.  In addition, once you turn age 70 ½, the law requires that you begin taking ‘Required Minimum Distributions’ or suffer a 50% penalty.  Finally, when you die, your heirs who receive what remains of your retirement account may face the imposition of both estate taxes and income taxes that could wipe out up to 70% of its value!


We are fortunate to work with many clients who have the desire to support charities and religious organizations.  Many choose to make substantial gifts from their estates at their death.  Typically this is done as a specific bequest in the will.  A better choice may be to designate the charity as beneficiary of all or a portion of their IRA account.  For example, instead of your will specifying that the charity receive $100,000, you make the charity the beneficiary of $100,000 of your IRA account.  As a result, your heirs receive assets with no income or capital gains tax liabilities instead of an additional $100,000 of IRA accounts where they will owe income taxes on withdrawals. The charity, on the other hand, receives $100,000 without any taxes due to its tax status as a charity.


If you don’t want to wait until you die to give money to your favorite charities or you are already making annual gifts to charities, the Pension Protection Act of 2006 may have provided you with an ideal solution.  For calendar years 2006 and 2007 you can transfer up to $100,000 each year directly to the charity or charities of your choice without federal taxation.  In order to qualify, you must be age 70 ½ or older, the charity must be a qualifying charity and the transfer must be made directly from your IRA custodian to the charity.  These gifts do count towards your Required Minimum Distribution.  Unfortunately gifts to Donor Advised Funds do not qualify.  While you do not receive a deduction for the gifts, you do avoid the tax traps often associated with taking a taxable distribution from your IRA and then writing a check to the charity.  “The IRA Charitable Rollover provides donors with a narrow window of opportunity to make substantial tax-advantaged gifts”, says Kate Nielsen, President of The Community Foundation of Greater Birmingham.