Here is a tax-smart way to make an impact to Jewish Federation of Omaha Foundation using your qualified retirement plan. The IRA charitable rollover (also called the Qualified Charitable Distribution, or QCD) is a great way to make a tax-free gift to Jewish Federation of Omaha Foundation and satisfy your required minimum distribution.
A gift of retirement plan assets could be right for you if:
- You have an IRA or qualified retirement plan, such as a 401(k) or 403(b).
- You do not expect to use all of your retirement plan assets during your lifetime.
- You have other assets, such as securities and real estate, that you want to pass to heirs.
- You may want to provide payments to loved ones after you are gone.
- You would like to make a bequest gift to JFOF.
Option 1: Make a tax-free gift with an IRA charitable rollover (also called a qualified charitable distribution, or QCD.)
You can make a tax-free gift from your traditional IRA. Such a gift is known as a Qualified Charitable Distribution or QCD. (Other qualified retirement plans such as 401(k)s and 403(b)s are not eligible). You must be at least 70 ½ years old to take advantage of this opportunity. Your QCD must go directly from your IRA administrator to JFOF. The total of all of your QCD gifts in any one year cannot exceed $100,000 per person. A spouse with a separate IRA could also make a QCD of up to $100,000 if they otherwise qualify.
The benefits of a QCD gift include:
- If you don’t itemize and are not yet required to take your RMD, a QCD offers all of the benefits of an itemized income tax charitable deduction.
- If you are age 72 and must take your RMD, a QCD can satisfy your RMD without increasing your income taxes.
- Your gift supports the important work of JFOF with a tax-free gift.
Option 2: Designate remaining retirement plan assets for Jewish Federation of Omaha Foundation.
Another attractive option is to designate JFOF as the recipient of some or all of what’s left in your IRA, 401(k), 403(b), or other qualified plan when they end.
In addition to having the satisfaction of making a significant gift to JFOF, your benefits include:
- Your estate is entitled to an unlimited estate tax charitable deduction for the value of your IRA donated to JFOF if your estate exceeds the applicable exemption.
- The QCD is an income tax smart gift. The SECURE Act enacted in 2020 limits prohibits stretching out distributions from an inherited IRA over the life of heirs.
- Since JFOF is tax-exempt, a gift to JFOF from your IRA is not subject to income taxes.
- Preservation of non-retirement plan assets for family.
Option 3: Designate remaining retirement plan assets for a life income plan.
Alternatively, you can designate that some or all of the assets remaining when your IRA, 401(k), 403(b), or other qualified plan ends be used to fund a charitable remainder trust or gift annuity arrangement that will make payments to family members or other loved ones for the rest of their lives. When the gift arrangement ends, what is left will go to JFOF.
In addition to having the satisfaction of making a significant gift to JFOF, your benefits include:
- A charitable trust or annuity can provide lifetime income for life since that is no longer possible after adoption of the SECURE Act. That law prohibits stretching out distributions from an inherited IRA over the life of heirs.
- The gift portion of your charitable trust or annuity provides an unlimited estate tax charitable deduction if your estate is subject to estate taxes.
- Such a plan preserves non-retirement plan assets for family.
IRAs and qualified retirement plans
Retirement plan assets are a major source of wealth for many households. For example, you may have hundreds of thousands of dollars invested in your IRA, 401(k), 403(b), or other qualified retirement plan. These plans do not pay tax on the income they earn, or the capital gain realized within the account. This allows the assets to grow faster than if held and invested these qualified plans.
The primary purpose of your retirement plan is to provide you with income during your retirement, but it can also be an excellent source of funds for making charitable gifts during your life and when your plan ends.
Withdrawals are taxed as income
With the exception of the Roth IRA, the money used to fund a qualified retirement plan, such as a traditional IRA, 401(k), or 403(b), has never been taxed. Also, earnings that occur within a qualified retirement plan are not taxed. As a consequence, withdrawals from any of these plans (except for the Roth IRA) are taxed as ordinary income. Your federal income tax alone on a withdrawal from one of these plans could be as high as 37%.
Withdrawals are required once you reach 72 years old
You must start taking withdrawals from your qualified retirement plan once you reach 72 years old. The amount you must withdraw each year is a percentage of the value of your retirement plan as of the last day of the previous year. The percentage starts below 4% for someone who is taking their first “required minimum distribution” and increases with age according to a schedule published by the IRS.
Taxes on remaining retirement assets can be very high
Your family members and other heirs will have to pay income tax on any distributions they receive from your retirement plan after you are gone. In addition, your qualified retirement plan is included in your estate, so if your estate is large enough to owe estate tax, your plan may increase the estate taxes you owe.
Federal income tax alone can be 37%. When you add federal income tax and estate tax together, they can total 62% or more. In states that assess their own taxes on estates, the total taxes on retirement plan assets paid to heirs can be over 62%.
Give retirement plan assets to Jewish Federation of Omaha Foundation and save taxes
In contrast to your retirement plan assets, your estate will not owe income tax on most of its other assets in addition to estate taxes that may be due. As a result, your estate and heirs will pay lower taxes if you pass your less heavily taxed assets to your heirs, and give your retirement plan assets to charity. Paying lower taxes will mean that more assets will reach your heirs. How much more will depend on the size of your estate, where you live, the other assets you own, and the type of gift you make.
How do I pass retirement plan assets to JFOF?
You have several good options for passing your retirement plan assets to us.
The simplest and most common way to give retirement plan assets is to make our organization a beneficiary of your retirement plan. All you need to do is to file a revised beneficiary designation form with your retirement plan administrator to designate our organization as a beneficiary of your plan and name the percentage of your remaining assets that you want us to receive. The retirement plan assets that you designate for us will avoid all income tax and estate tax. In order for your estate to enjoy both of these tax benefits, it is especially important that you make our organization the designated beneficiary of these retirement plan assets, not your estate. Please identify us on the form with our legal name: Jewish Federation of Omaha Foundation.
Life income plan
Prior to the passage of the SECURE Act in 2020, inherited IRAs could stretch out their taxable distributions over the life expectancy of your heirs. The SECURE Act requires an inherited IRA to distribute all of its assets within 10 years. With the elimination of the stretch IRA, an attractive option for planning so that inherited retirement plan assets can pay income for life is to designate a charitable remainder trust or charitable gift annuity as the beneficiary of your retirement plan. Passing assets to us through a life income plan allows you to provide income to your loved ones after you are gone and then provide support to us. Such a plan strikes a balance between leaving all of your retirement plan assets to loved ones subject to significant taxation and leaving all of these assets to us and eliminating taxes on them altogether. Here's how a life income plan works:
- Your retirement plan transfers the designated portion of its final balance to a charitable remainder trust or a charitable gift annuity.
- The heirs you have chosen receive payments from the plan each year, typically for life.
- When the life income plan ends, its remaining principal goes to support JFOF.
Using retirement plan assets to fund a life income plan spreads out income tax and reduces estate tax on these assets, if your estate is subject to estate taxes. A typical result is to reduce total taxes on your retirement assets by more than half compared to distributing them to your heirs through your estate.
Life income plan options
There are several life income plan options to choose from. The one that is right for you will depend on a variety of factors. Please contact us if you would like to learn more about funding a life income plan with assets from your retirement plan.
Jake Henderson, 75, is a retired business executive who has accumulated $500,000 in the retirement plan that he set up through his company years ago. He takes minimum distributions from his plan in order to preserve as much tax-free growth inside the plan as he can. At this rate, he expects that his account may still be worth $500,000 when he dies.
Jake has reached the time in his life when he has begun thinking about the legacies he wants to leave behind after he is gone. He decides to leave a bequest to Jewish Federation of Omaha Foundation to create an endowed fund that will perpetuate generous support in his name. To accomplish his goals, he designates 40% of the final balance in his retirement account for Jewish Federation of Omaha Foundation.
- There will be no income tax or estate tax on the 40% of Jake's retirement plan assets that are transferred to JFOF.
- Assume the balance in Jake's IRA when it ends is $500,000 and he donates 40% of that balance ($200,000) to JFOF. If Jake were to pass the same amount to his family, that distribution would be subject to ordinary income tax. His family would owe income tax of $74,000 (37% bracket) on the IRA assets, leaving only about $126,000 for their own use. If Jake’s estate is subject to estate tax the tax savings would be even greater since his estate would be entitled to an estate tax charitable deduction of $200,000.
- Jake has the immediate satisfaction of knowing that he has put a gift plan in place that will keep his name alive and support Jewish Federation of Omaha Foundation long after he is gone.