Satisfying Charitable Gifts With Individual Retirement Account Assets

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Satisfying Charitable Gifts With Individual Retirement Account Assets


By: Kevin A. Ganser, Esq., LL.M. in Taxation

According to Charity Navigator, total charitable giving in 2017 increased to $410m, which represents a 5.2% increase in giving from 2016. Indeed, charitable giving has increased year over year every year since 1977 (with the exception of 1987, 2008, and 2009; all of which coincided with worldwide financial crises). Perhaps contrary to public opinion, the increase in donating charitable gifts shows that our society has become more generous, not less.

As attorneys, we are often confronted with ways in which we can either assist with or leverage clients’ charitable giving. While there is a veritable slew of charitable giving techniques that a client may deploy to enjoy tax benefits from their giving, a simpler solution exists in the form of the humble IRA: an asset that is often a significant portion of our population’s average financial portfolio.

As most people are aware, retirement plans have some significant upsides, such as:

  • Deferral of income tax.
  • Creditor protection.
  • Potential employer-sponsored matching.

However, the downsides can be harsh, including:

  • 10% penalty for withdrawal prior to age 59 1⁄2 (with some hardship exceptions).
  • Mandatory required minimum distributions (“RMD’s) beginning at age 70 1⁄2.
  • Ordinary income tax treatment of distributions (i.e. all proceeds from any IRA are taxed no differently than a typical paycheck, according to your tax bracket.

Given the significant downsides, what many charitably-inclined clients may not realize is that after reaching age 70 1⁄2, it is possible for a client to donate their RMD’s and additional amounts up to $100,000 of pre-tax IRA (including rollover IRAs) assets to charity per year without realizing any income tax consequences. Indeed, from a tax efficiency perspective for the average charitable “giver”, donating a portion of their retirement plan assets may indeed result in superior tax outcome.

To illustrate, consider the following: Carl and June are animal lovers, and consistently make monthly or annual donations to their favorite rescue shelter. Rather than using “post-tax” dollars that they earned during their career, they choose to donate the RMD’s from their IRA instead. Assuming that Carl and June are in the 28% tax bracket, after tax considerations are taken into account, they are actually able to give their favorite charity a 28% larger gift due to the fact that: i.) they never paid tax when the dollars were transferred to the IRA, and; ii.) the distributions from the IRA were also never taxed upon the transfer to charity.

In short, with thoughtful consideration and appropriate tax counsel, our clients can help their favorite causes while also enjoying substantial tax benefits.

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