For many clients, retirement accounts represent one of their largest assets, and one of the most complex from a tax-planning perspective. As clients approach retirement and begin taking required minimum distributions (RMDs) or consider their estate plans, it is worth looking beyond simply deciding when and how much to withdraw.

For charitably-inclined clients, retirement assets can also be a powerful tool for creating a lasting charitable legacy while potentially reducing the tax burden on themselves and their heirs.

Start with the tax character of the asset

Not all assets are created equal when it comes to taxes. Traditional IRAs and other tax-deferred retirement accounts generally carry ordinary income tax consequences when distributed. If these assets are ultimately left to heirs, beneficiaries may also face compressed distribution timelines and significant income taxes.

A charitable organization generally can receive retirement assets without the income tax consequences that would apply if the same assets were distributed to an individual. This can make retirement accounts an efficient asset for charitable bequests—particularly when clients have other assets that may be more tax-efficient for their heirs.

Consider a qualified charitable distribution during life

For clients age 70½ or older who are charitably inclined, a qualified charitable distribution (QCD) can be a valuable planning tool.

A QCD allows an eligible IRA owner to make a direct distribution from an IRA to a qualifying charity, subject to annual limits and other requirements. The distribution can satisfy all or part of the client’s RMD while generally being excluded from the client’s taxable income.

For clients who do not need their full RMD to support them, a QCD may provide an opportunity to:

• Fulfill charitable intentions using retirement assets.
• Reduce the amount of an RMD included in taxable income.
• Support organizations or charitable funds that are meaningful to the client.
• Potentially reduce the impact of retirement income on other aspects of the client’s tax picture.

QCDs must meet specific IRS requirements, including the age of the IRA owner, the type of retirement account, the receiving charity and the manner in which the distribution is made. (Note: Donor advised funds cannot receive QCDs.)

Look at retirement accounts as part of the estate plan

Retirement assets also deserve careful attention when reviewing beneficiary designations.

For clients who want to leave a legacy of giving, naming a charity as the beneficiary of all or a portion of an IRA or other eligible retirement account can be an efficient estate-planning strategy. The charitable beneficiary can receive retirement assets without the income tax consequences that would generally apply to an individual beneficiary.

This can create an important planning opportunity: leave the most tax-burdened assets to charity and preserve more tax-efficient assets for family members.

Depending on the client’s circumstances, this may allow the family to receive assets such as appreciated securities, real estate or other property that may receive a step-up in basis while directing retirement assets to charity.

Don’t forget the client’s broader goals

The best charitable planning conversations are not simply about taxes. They begin with the client’s goals.

Questions to ask your clients:

• What assets do you want your family to receive? Understanding the client’s priorities for heirs can help determine which assets are best suited for charitable giving.
• Do you expect to need your retirement assets during your lifetime? If not, charitable giving may be incorporated into the client’s distribution and estate strategy.
• Are you already making charitable gifts? Existing charitable giving may create opportunities to coordinate QCDs, beneficiary designations and other giving strategies.
• What causes or organizations are important to you? A charitable plan should reflect the client’s values, not simply produce a tax result.

Coordinate the plan across the advisory team

The right strategy may allow a client to meet lifetime charitable goals, reduce tax exposure and create a more meaningful legacy for both family and community.

Retirement and charitable planning often touches several areas of a client’s financial life. Attorneys, CPAs, financial advisors and philanthropic advisors can each play an important role.

A coordinated approach can help ensure that beneficiary designations, retirement distributions, estate documents and charitable intentions work together rather than independently. NCCF’s development team is here with resources to support your client relationships.

Beyond the tax advantages, this approach can help make giving an easy and powerful act. Whether it’s giving to one of NCCF’s local affiliates or creating a fund to support local community needs, giving wisely with retirement assets is a one way to create a legacy. 

This article is intended for educational purposes only and is not tax, legal or investment advice. Clients should consult their qualified tax, legal and financial advisors regarding their individual circumstances.