If you are trying to make the world a better place, giving to charities is probably part of who you are. And, if you are fortunate enough to have accumulated a large retirement account, you may have a special opportunity to use your IRA or 401(k) to make gifts that can reduce your tax burden.
The fall appeals from charities have already begun. I received my first one on Saturday, September 4th. Charities need money to survive and the fall leading up to the holidays is typically when they start sending out their mailers and emails.
But how you give and what you give can make a big difference on your tax return.
In this blog we often talk about the advantages of gifting shares of highly appreciated stock. For many it removes a big capital gains tax bill. But for older investors with large IRAs, there may be better ways to give.
Designating a charity as a beneficiary
You can leave money to a charity by selecting them as a beneficiary of your retirement account. When you die, they will receive the proceeds tax-free. Now, you don’t have to leave them the whole IRA or even make them the first in line. For couples, you can make your spouse your primary beneficiary (they get first dibs). If they are deceased, the assets then pass to the contingent beneficiary(ies). Often families name their adult children here. But there is no reason, a charity(ies) cannot also be listed.
For example, if you have three children, you may want to list four contingent beneficiaries. You can determine the percentage each one receives such as 30% for each child and 10% to a charity. Of course, this strategy means that the charity has to wait until you and your spouse has passed away to receive the gift. It can be a nice way of making an important final gift to a charity you care about.
We often advocate to give charitable gifts (if possible) while you are still alive. This allows you to see the charity put your contributions to work while you are still around. If you are interested in this approach, you may want to consider a Qualified Charitable Donation.
Giving while you are still around
Qualified Charitable Donations are for those who are subject to Required Minimum Distributions (RMDs). RMDs must begin once you reach age 72. However, you can make a QCD directly to a charity and it can reduce your RMD. A QCD does not trigger taxable income like an RMD. However, you must make your QCDs first in order for the distribution to count towards fulfilling your RMD. If you take all of your RMDs first and then take more distributions from your IRA with the idea of giving to a charity, those distributions will not qualify as a tax-free distributions. There are limits, too. The maximum amount of a QCD in a single year per taxpayer is $100,000.
Leaving a legacy for your children
As you think about giving, don’t forget about the messages your giving will leave for your children and grandchildren. Whether giving to a charity or your grandchild’s college education, I’ve heard lots of stories from clients over the years telling me about how generous their parent or grandparents were. Giving can provide you with teachable moments to show your kids and grandkids who you really are.
Don’t feel like you’ve got enough to give it all away? No one said you had to give it all away to show your charitable intents. Sometimes small acts have big impacts.
‘Still have questions about using your IRA for giving, give me a call. I’m here to help. You can also schedule a quick call with me by clicking HERE.
Lyman H. Jackson
Click HERE to receive our award-winning newsletter. We never share your info and you can unsubscribe at any time. Check out more blogs from on vacations at www.PlanWithFPS.com/blog · Giving to charity: 5 year-end tips https://planwithfps.com/blog/giving-to-charity-5-year-end-tips · 5 things you should do to be ready for your golden years https://planwithfps.com/blog/5-things-you-should-do-to-be-ready-for-your-golden-years
· Big IRAs: When maxing out a 401(k) / 403(b) doesn’t always make sense https://planwithfps.com/blog/big-iras-when-maxing-out-a-401k403b-doesnt-always-make-sense
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