Tax Consequences of Gifting Retirement Benefits
You can make significant gifts to family members or charitable organizations by using your retirement assets. But it’s vital that you consider the tax aspects of such gifts, as well as their timing. It could make a huge (expensive) difference to you – and to your intended beneficiaries.
Retirement assets can be gifted during your lifetime or upon your death. They deserve careful consideration since, on average, these assets may amount to a third or more of a typical estate.
Lifetime Gifts
Because there may be penalties to pay for early withdrawal of retirement funds, estate planners recommend that these assets not be used for gifts before age 59 ½. However, at that age you may access retirement holdings without penalty. It may be to your benefit to begin withdrawing assets then and make offsetting charitable gifts from the same fund to neutralize the tax consequences. Care must be taken to review your overall tax profile with regard to future long-term planning and whether you itemize deductions.
At 70 ½, mandatory minimum retirement fund withdrawals are imposed, along with a requirement that you pay taxes on that money. But if you’re in a position where retirement funds are not needed for personal expenses, you might consider using that money for charitable giving. Hopefully such donations would reduce or completely offset the additional taxes required resulting from the mandatory withdrawals.
Even better, you may set up a “qualified charitable distribution” (QCD) process to make this more convenient. A QCD allows you to make direct transfers of certain retirement assets to a qualifying charitable organization. This has the advantage of lowering the amount of required withdrawals from your retirement fund, as well as avoiding payment of tax on those transfers. There are some limitations:
– You must be 70 ½ or older
– The most you can transfer is $100,000
– The funds must be transferred directly from an IRA or IRA rollover account
– A QCD is also now allowed for 401(k) or 403(b) and other retirement packages
For more ideas, see this helpful article: Think You Are Debt Free If You Own an IRA, 401(k), or 403(b)? Think Again
Gifts Upon Death
If you die with major yet-to-be-taxed assets in your retirement accounts, keep in mind that your beneficiaries must take on this tax burden when the funds are distributed. However, there are options to set up trusts of various kinds or other vehicles designated for donations to not-for-profit organizations that are tax-exempt. Read my article from last year The Season for Charitable Giving. At the same time, there are some limits on the amounts of such gifts.
Careful planning is required to consider the most effective planning for your retirement accounts, including charitable gifts, without transferring undue tax burdens to your heirs and beneficiaries. Expert help is recommended.
Please call my office if we can be of assistance.