Retirement Plan Assets

Leaving more to loved ones and charitable causes

More people participate in tax-favored retirement plans today than ever before. While participants are committed to accumulating and growing these assets, few have planned for the harsh tax consequences associated with retirement plan distributions—a tax at rates up to 37 percent. With that in mind, let’s address some frequently asked questions concerning how you can use retirement plan assets to make charitable gifts—leaving more to heirs and the charities you love and support.

Retirement plans provide financial security. Is giving away these assets a good idea?

We are certainly encouraged to save for retirement from an early age, and tax-favored retirement plans have an important place in accumulating savings for retirement. Still, there are good reasons to consider donating these funds:

  • Some professionals have accumulated sufficient resources outside of their retirement plans—enough that they no longer need the dedicated funds for support during retirement.
  • Retirement plan assets are highly taxed and cannot be distributed or transferred to heirs on a tax-free basis. Other savings and investments that have already been taxed can be transferred to heirs with no additional tax—some (appreciated stock or real estate, for example) with the bonus of a step-up in basis. Income taxes on retirement plan assets reflect the fact that these funds have accumulated on a tax-deferred basis, with the IRS simply waiting until assets are distributed to “recoup its losses.”
  • A gift of retirement assets to a qualified charitable organization can reduce or eliminate these taxes, while providing more for family members by allowing other assets to transfer free of tax. The key is integrating charitable giving with overall financial and estate planning.

What does it mean to integrate charitable giving with overall financial and estate planning?

Rather than leave retirement plan assets to family members, you can use those assets to make charitable gifts, leaving other assets (such as appreciated property) that benefit from favorable tax rules to family members.

Example: Carolyn, a widow, plans to leave a gift to IU in her will and also wants to provide for her children. Her assets include a retirement plan and appreciated stock. For tax purposes, a good approach would be for Carolyn to leave the retirement assets to IU and the appreciated stock to her children. Her children would have to pay income tax on the retirement plan assets, but as a tax-exempt organization, IU does not. By contrast, when her children receive the appreciated stock, no tax is due until they actually sell the stock; even then, the tax is based only on the amount the stock appreciates after the children receive it. The appreciation that occurred during Carolyn’s life is never taxed, increasing the real value of the gift to her children.
Example is for illustrative purposes only.

What kinds of retirement plan assets are used to make a charitable gift?

When we talk about retirement assets, we are typically referring to assets held in a qualified retirement plan or IRA. A qualified retirement plan is one that receives favorable income tax treatment. Participants are not taxed on the contributions they make to the plan and pay no income tax on the growth of the assets within the plan. Income tax is due only when funds are withdrawn. There are two types of qualified plans:

While it is not considered a qualified plan, an IRA is also an excellent source of funds for charitable giving.

Receive and hold annual employer and/or employee contributions. A 401(k) plan is a good example. The amount available at retirement depends on the amount contributed and the investment experience over the years.

Primarily funded by the employer (typically large corporations) and promise to pay a specific benefit at retirement age. The amount of the benefit depends on factors such as age and service.

Under a defined benefit pension plan—since payments typically terminate at death for a single life pension—there is usually nothing available to leave to charity. On the other hand, when a participant in a defined contribution plan dies, there is frequently an undistributed portion that can be transferred to other beneficiaries, including a favorite charitable organization.

While it is not considered a qualified plan, an IRA is also an excellent source of funds for charitable giving. An individual who establishes an IRA enjoys the same tax benefits as participants in qualified plans—no income taxes on contributions and tax-deferred growth in the plan.

How are retirement plan assets donated?

The most straightforward way to donate retirement plan assets is to designate IU as a beneficiary. To do this, contact your plan administrator, who will guide you through the process. IU Foundation tax attorneys are happy to assist you as well.

You have considerable flexibility when you designate IU as a beneficiary. For example, you can specify an amount or percentage that IU will receive, leaving the rest to other beneficiaries. You can also name your spouse as the primary beneficiary and IU as the secondary beneficiary, to receive the assets only if your spouse cannot. There are many possibilities.

Another option is to have your retirement plan assets transferred at death to a charitable remainder trust. If your spouse is the trust beneficiary, it’s possible (by combining this strategy with the unlimited marital deduction) to eliminate all federal estate taxes attributable to the retirement account.

Example: In his will, George funds a charitable remainder trust with an IRA. The trust will pay his wife, Barbara, 5 percent of its value annually for as long as she lives. At her death, the remaining trust assets will pass to IU. Since Barbara’s interest qualifies for the estate tax marital deduction, and the charity’s remainder interest qualifies for the estate tax charitable deduction, the entire value of the trust will be deductible from George’s estate.
Example is for illustrative purposes only.

Also, keep in mind the advantages of naming a charitable remainder trust as the beneficiary of an IRA: There are no income taxes on the transferred funds because the trust is a tax-exempt entity. The trustee can invest the full amount in income-producing assets without the need to follow complex IRA distribution rules.

Can assets be transferred directly from a retirement account to charity?

There is only one option for transferring assets directly from a retirement account: a qualified charitable distribution (QCD) from a traditional IRA.

If you are age 70½ or over, you can instruct the IRA custodian to make a tax-free transfer of up to $105,000 (annual aggregate limit in 2024) directly from an IRA to charity. That counts toward your required minimum distribution (RMD) if one is due. While there is no tax deduction, the distribution is excluded from income for federal tax purposes.

Another option is making a one-time QCD up to $53,000 (as of 2024) to fund a new charitable remainder trust or charitable gift annuity. Like the traditional QCD option, there is no tax due on the distribution, and the amount counts toward your RMD if one is due.

There is no direct transfer option for other types of retirement assets. However, you can receive a distribution and then make a gift that qualifies for a charitable tax deduction. This deduction offsets part or all of the tax payable on the distribution.

Make the most of your retirement assets

There are many estate planning strategies that can provide a combination of tax savings and personal satisfaction. You can implement many of these strategies with the help of experienced professionals at the IU Foundation.