Retirement Assets and Charitable Giving
The Sweet Life: Using Retirement Assets to Create a Family Endowment
Creamy milk chocolate, earthy dark chocolate, smooth white chocolate – in any form, this treat appeals to almost every sweet tooth on the planet. Chocolate comes from the fruit of native South American trees called Theobroma cacao, which is Greek for “food of the gods.” This nearly magical food is reported to protect the heart and create a positive mood.
Charitable giving is also good for the heart (although not in the same way as chocolate or exercise), as it produces positive feelings in the giver. Using retirement assets to make gifts not only feels good, but can provide unique benefits and opportunities.
Making a Gift Directly From an IRA to Charity
It’s a “win-win” scenario when a gift is made directly from one’s IRA to charity. The charity’s mission is to strengthen while the donor receives the tax advantage, making this giving option almost as good as chocolate! The amount distributed counts toward the individual’s required minimum distribution (RMD), the smallest amount account holders must withdraw from retirement plans each year once they reach retirement.
At age 72, the IRS requires IRA owners to begin taking minimum distributions without regard to financial circumstances or need. Failure to take an RMD results in an IRS penalty of 50% of the amount that should have been taken but was not – quite a hefty fine!
For example, if Ms. Candy Kane owned an IRA but refused to take her required minimum distribution of $9,000, Candy would be subject to a penalty of $4,500 for failing to take the RMD. If she took $5,000, she would still be penalized for failing to take the remaining $4,000 – a penalty of $2,000.
Let’s Look at an Example:
Billy Bonka never achieved the legendary status that his second cousin found with his chocolate factory, but, nonetheless, Billy was secure in a well-funded retirement. When Billy retired at the age of 72, he began to look for additional ways to support his favorite charities. After speaking with professional advisors, Billy realized he was neglecting a tremendous source of potential donations – his retirement assets! Billy had an IRA from which he needed to begin taking an RMD of $10,000. However, since Billy’s financial situation was solid, he did not need the RMD. Instead, Billy directed his IRA administrator to make a qualified charitable distribution (QCD) of the full RMD amount to Billy’s qualified charity.
At tax time, Billy’s tax preparer noted on Billy’s return that the full amount of the RMD was a QCD. While Billy did not qualify for an itemized charitable deduction, he benefited because he did not have to report the RMD as income for his taxes. In addition, the QCD had no impact on Billy’s overall charitable giving limitation, meaning Billy could still claim a deduction for other charitable gifts.
Utilizing Retirement Accounts for a Family Endowment
A family endowment can be the perfect solution for unneeded retirement income.
Ideas for utilizing retirement assets:
1 Establish your family endowment through a simple fund agreement and direct your RMD to it every year, slowly building up the balance of the fund. Once the fund reaches $25,000, it begins granting to the organizations you name. Continue directing your RMD to the fund year after year so that the fund balance increases over time. The fund will continue growing and granting to the recipients FOREVER.
2 Direct your RMD to your family endowment during your lifetime and name the endowment as the beneficiary (full or partial) of your retirement asset. After your lifetime, the asset will be deposited into the fund – continuing to support the organization(s) named FOREVER.
3 Endow your annual gift to the parish, school, or ministry close to your heart. Your financial support of those programs and organizations can continue after your lifetime through a family endowment. And the best part is that endowments grow even as they generate grants, so the support from your endowment will grow – FOREVER.
Minimize tax liability Impact the ministries closest to your heart
Inspire others through your stewardship
Leave a family legacy of love and faith
Now that’s a sweet life!
As a qualified charity, the Catholic Foundation can provide customized recommendations and solutions for your charitable giving. To make the best use of your RMDs, contact us today for a conversation.
Disclaimer: This information is not intended as tax, legal, or financial advice. Please consult your professional advisors for specific guidance on your situation.