Retirement Plan Gifts

Millions of Americans have taken advantage of tax incentives provided by Congress to encourage saving for retirement through contributions to Individual Retirement Accounts (IRAs), 401(k)s, and similar plans.

In addition to income tax savings at the time contributions are made to such plans, the assets in the plans then build tax free over time for future enjoyment.

Amounts held in tax-favored retirement plans are typically not subject to income tax until they are actually withdrawn from the plan by the plan owner or surviving heirs.

Making gifts today

You may find that your retirement plan can also at times be a convenient "pocket" from which to make charitable gifts to SPCA International each year.

If you are over the age of 59½, and can make withdrawals from your traditional IRA or other tax-favored retirement plan without triggering an "early withdrawal" penalty, you may wish to make withdrawals from retirement plans in amounts sufficient to fund all or a portion of your charitable gifts. Those over the age of 70 1/2 who are required to take mandatory withdrawals from retirement accounts in excess of amounts needed to fund current living expenses may also wish to make their gifts in this way.

Although you will be required to report the income on your tax return, when you itemize your deductions you are allowed a corresponding federal income tax charitable deduction for your cash gifts up to 50% of your adjusted gross income (AGI).

If you are able to deduct the full amount of the gift/withdrawal, this can amount to a "wash" for tax purposes and ensure these funds will, in effect, never be subject to gift, income, or estate taxes. You may also enjoy comparable state tax savings.

You should seek assistance from your accountant or other advisor when determining the optimum amount to give from retirement plan accounts under federal and state tax laws.

Example

John, age 64, enjoys making charitable gifts in the form of cash each year. This year, after reading about the benefits of gifts using funds from retirement account assets, he decides to make a portion of his gifts using amounts withdrawn from his IRA.

Summary of benefits:

• John reports the withdrawal amount on his federal income tax return but enjoys a deduction that, in his case, fully offsets tax that would otherwise be due. 
• His state also does not impose tax on the amount withdrawn.
• Additional tax is not incurred on his Social Security income
• The amount donated is removed from his estate and his heirs will inherit other assets that will not be subject to income tax when received. 

Watch for special provisions

Legislation is pending in Congress that would renew special opportunities for gifts from traditional and Roth IRA funds for persons over age 70 ½. Provisions that expired at the end of 2009 allowed for non-taxable gifts to be given directly to qualified charitable interests. Check here or with your tax advisors for the latest information regarding the status of this legislation.

Offset taxes from Roth IRA conversion

If you are among those considering converting a traditional IRA to a Roth IRA, you may wish to explore how charitable gifts may help reduce taxes that would otherwise be due on the conversion.

There are many ways that carefully combining charitable gift planning with a Roth conversion may be beneficial. For example you may wish to consider the following alternatives:

• Make additional charitable gifts of cash this year that can serve to fully or partially offset Roth conversion income that would otherwise be subject to tax.
• Instead give appreciated securities or other assets and also bypass capital gains tax that would be due on a sale, while deducting the full value of the securities.
• Use cash or other assets to fund a charitable remainder trust or other gift that features income for life or other period of time and use the resulting income tax deduction to help offset Roth conversion income.
• If you have unused charitable deductions you can carry forward as a result of gifts completed in the past, consider using these deductions this year to help reduce or eliminate tax on your Roth conversion income.

Check with your advisors about these and other options that may help you make meaningful charitable gifts as you consider whether to convert all or a portion of a traditional IRA to a Roth IRA.

Avoid double taxation

You may also want to consider including charitable gifts to SPCA International as part of your plans for the future distribution of any balances remaining in your retirement plans at the end of your lifetime.

Because they are included as part of one's estate at death, the assets in tax-favored retirement plans such as an IRA, 401(k), SEP, and others can be subject to any applicable federal (and perhaps state) estate taxes.

Additionally, when heirs receive the balance of retirement plans after payment of any state or federal estate taxes that may be due, income tax will also be due—up to 35% or more—depending on state income taxes and other factors. Thus, the combination of income and estate taxes that could eventually be levied on retirement accounts may, in some cases, amount to a large portion of an account's value.

Rather than allowing retirement assets to be reduced by a combination of estate and income taxes, you can direct that such assets be used to fund charitable gifts to SPCA International from your estate. This can actually result in more assets being received by loved ones than if retirement assets were left to family and charitable gifts were made from other funds.