Giving Through Retirement Accounts
Charitable Giving Through Individual Retirement Accounts
In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA) to ensure that employees would receive the retirement income employers promised through pension funds. ERISA covered lots of employer-promised benefits including retirement and health care, and created a new option for Americans called an Individual Retirement Account, known simply as an IRA.
The idea was that taxpayers could contribute an amount each year, reducing their taxable income by the amount of the contribution. Additionally, the value inside the IRA could grow without being subject to tax until it was withdrawn; earnings were tax deferred.
IRAs have been a popular way to reduce income taxes because they allow individuals a wide array of investment opportunities that qualify. Many investors now have IRAs that have grown substantially.
Incomes are now much higher than they were when IRAs were first created, and individuals often put off taking withdrawal from their accounts—and paying the deferred tax--for as long as possible. When the investor reaches the age of 72, they are required to take a minimum withdrawal. That distribution may make a significant impact on their tax liability.
Fortunately, there is a way to make that Required Minimum Distribution (RMD) without having to pay tax on it. By directing your IRA custodian to make that distribution directly to a qualified charity, the amount will not be taxable (Note: It must be distributed directly from the fund and not to the investor to pass on to the charity). RMDs occur with other qualified retirement accounts as well.
While the qualified charitable distribution is not tax deductible, it reduces tax liability by not increasing taxable income. With today’s increased standard deduction, the benefit can be significant.
You may need the income provided by your IRA during your lifetime. If you name a charity as the beneficiary for your account, any remaining value will pass to charity at your death.
We have prepared a special report, A Guide to Charitable Giving Through Your Retirement Accounts, to help you understand options to maximize the personal and charitable benefit from your retirement accounts. The guide is free. There is no cost or obligation.
About Withdrawals from Retirement Accounts
Once you attain the age of 59½ you can generally make withdrawals from retirement plans without penalty. If you withdraw sooner there will likely be a penalty assessed in addition to tax owed on the amount withdrawn. There are some exceptions: If you use the money to buy a first home or pay for medical expenses, the penalty may not apply.
On the flip side, when you reach age 72 (if you were born before 1951), you are required to begin taking distributions from your retirement plans. A required minimum distribution is the minimum amount you must withdraw from your account each year. This requirement applies to qualified, pre-tax investments in retirement funds. Roth IRAs do not require withdrawals until after the death of the owner.
If you inherit a retirement plan (IRA, SEP, annuity, etc.) from someone who had already begun withdrawals, you will need to continue making those withdrawals, and you will be taxed on the amount you receive. For some, adding the withdrawal to current income may place the individual in a higher tax bracket, creating an unwelcome tax burden.
If you are age 72, the tax implications for a required minimum distribution can be avoided. If distributions are made directly from the retirement account to a qualified charity instead of an individual, the tax can be avoided. Such distributions may be made each year and will serve to satisfy some or all the required minimum distribution.
If you are considering when to make a withdrawal from retirement funds or are in need of making a Required Minimum Distribution (RMD) and would like more information, we are happy to help.
We have prepared a special report, A Guide to Charitable Giving Through Your Retirement Accounts, to help you determine how IRA distributions work as an excellent charitable giving tool. The guide is free and can be downloaded here. There is no cost or obligation.
Create a Charitable Gift, Increased Income, and Joy
Very few people would refuse an increase to their income if offered. It is common to want to be able to afford items of necessity and to have extras. Many also desire to be able to give more to the ministries they love. There may be a way to do both—with a charitable gift annuity.
When you create a charitable gift annuity, often known as a CGA, you enter into a contract with a charity. You donate a gift of cash, securities or other assets, and in return the charity provides you with a fixed stream of income for the remainder of your life.
Individuals or couples can set up charitable gift annuities. CGA’s are very popular because they can be funded with a variety of assets that might otherwise sit unused or produce minimal income. With a charitable gift annuity, you receive income plus a charitable tax deduction for the gift portion of your agreement. In addition, part of the income you receive will be tax free.
A Guide to Charitable Gift Annuities
With a charitable gift annuity, you may increase your income even as you make a gift. If you are retired or near retirement, if you have appreciated assets, or would simply like to know how you can make a charitable gift and retain the income, follow the link to download our special planning report, A Guide to Charitable Gift Annuities. It will give you many details about how this agreement could work for you.
Consider a Charitable Income Agreement
As record numbers of individuals enter their retirement years, many are discovering that IRA's, 403b plans and other retirement plans, coupled with Social Security, will not provide adequate income.
Some have found it harder to set aside adequate savings when they are facing towering education expenses, skyrocketing housing costs and increased tax liabilities.
Originally, IRAs promised tax-deferred investment and growth. They also promoted the idea that by setting aside tax-deferred dollars today, you would be able to withdraw those funds when you retire with a savings, because your tax bracket should be significantly reduced once you stop working.
But 2 factors detract from the original plan. First, many retirement plans have performed very well over the years with significant gains in value. Since they were funded with pre-tax dollars, these funds will be subject to income tax as they are withdrawn. Secondly, federal, state and local tax burdens are significantly greater. The result is that many now face tax liabilities they never dreamed of when they began saving years ago.
Other factors may be adversely affecting your plan:
· You may be paying sizeable income taxes before putting away part of your remaining net income.
· There may not be enough time to properly manage the investment of your nest egg.
· The funds are attachable by creditors.
· Upon your death, the funds remaining in your estate may be subject to tax.
Fortunately, there are still some very good charitable solutions to help solve these problems. A Charitable Income Agreement can provide retirement income, create a current income tax charitable deduction, and assure a future gift to ministry.
Case Study
Let’s consider an actual case. Frank is 37 years old and wants to set aside more for retirement income than traditional planning tools allow. He also wants greater flexibility, without penalty, should he wish to start receiving income earlier or later than the law requires under traditional retirement plans.
He establishes a Charitable Retirement Income Trust with the understanding that he will contribute $5,000 per year until he is 65. The annual contribution he plans to make is entirely flexible, he can transfer more or less, or even skip a payment, if he chooses. And he can begin receiving income in the year of his choice.
Assuming Frank continues the same commitment each year, he will contribute a total of $140,000 over the next 28 years, generating approximately $41,500* in combined income tax deductions. If Frank lives to normal life expectancy, and assuming a reasonable projected asset growth, the income trust will pay him approximately $530,000* during his retirement years.
Using the tax savings created by his contributions to the trust, Frank can fully replace the value of the assets in the trust for the benefit of his children, without estate tax concerns. In the meantime, his retirement assets cannot be attached by creditors.
When Frank dies, his chosen charity will receive the trust remainder, estimated to be nearly $450,000*, and his children will receive their assets in cash, free of income and estate taxes.
What This Means for You
By entering into a Charitable Income Agreement, you can
· Gain income tax advantages,
· Increase your cash flow in retirement years,
· Offset other income taxes you may be paying,
· Reduce your estate taxes
· Increase distribution to beneficiaries at your death
All while you are caring for the needs of your family. You are helping secure the future of the ministries you choose to support and helping others--thanks to your careful planning.
We have prepared a special planning report, A Guide to Charitable Income Agreements, that outlines the advantages of establishing a charitable income agreement. This report is yours without cost or obligation.
*Deduction based upon current interest assumption; growth calculated with 7% total return, assuming 5% payout at retirement.