Giving through Retirement Assets
Many Americans have tucked away a substantial sum of money in an IRA, 401(k) or other retirement plan. When donors find they don’t need that money to pay living expenses as they age, they may consider gifting a portion to IU School of Medicine to support medical education or research. Many compelling reasons exist to use these funds to make a charitable gift.
Gifts Made in Life
Traditional IRAs are attractive saving tools because they allow a person to squirrel away money for retirement pre-tax. But that also means the money counts as income—and is taxed accordingly—when you begin withdrawing it. Depending on the amount stashed away, that can have a significant impact on income tax.
For people who are philanthropically inclined, a charitable IRA rollover may be an appealing opportunity to support IU School of Medicine and improve a tax situation at the same time.
The popular provision, made permanent by Congress in late 2015, allows individuals who are at least age 70½ to make a charitable gift of up to $100,000 annually directly from their IRA. Here’s what you need to know about a charitable IRA rollover:
- The gift counts toward the required minimum distribution.
- The amount is not included as income, thereby keeping adjusted gross income lower. That’s important for a variety of tax calculations that affect everything from eligibility to take certain deductions to how Social Security income is taxed. Adjusted gross income even factors into Medicare premiums.
- Donors can give up to $100,000 from an IRA every year, and the gifts can be used to fulfill a multi-year pledge.
- A charitable IRA rollover cannot establish life-income gifts such as a charitable gift annuity or charitable remainder trust.
Donors who are not yet 70½ can still take a distribution from an IRA and make a gift via check. Income tax will need to be paid on the amount of the withdrawal, but the donation creates a charitable income tax deduction on itemized personal tax returns.
Gifts upon Death
Often, pre-tax accounts—an IRA, a 401(k) and 403(b)—are some of the least desirable assets to leave to your children or other heirs. First, the value of the funds is considered when calculating any applicable estate taxes, which can total as much as 40 percent on high-worth estates that exceed the federal exemption.
But even if an estate isn’t subject to the estate tax, pre-tax retirement accounts can still leave the beneficiary with a hefty income tax burden. Since these accounts allow a person to defer paying income tax on the money contributed, the person who inherits the fund is required to pay taxes on it. Depending on his or her tax bracket, that could mean turning over nearly 40 percent to the federal government—in addition to possibly paying state income tax.
If interested in leaving money to a cause you care about, consider naming a charity as the beneficiary and leaving other, more tax-favored assets to loved ones. Charitable groups aren’t subject to these taxes, so the entire amount of the fund can benefit the organization. Donors retain ownership of the account and may continue to withdraw from it during their lifetime.
To donate an IRA or other pre-tax retirement funds to the IU School of Medicine, simply list “Indiana University Foundation for the benefit of the IU School of Medicine” as the sole or partial beneficiary of the fund.