Retirement Accounts

by Shaun Sommerer

Due to increased awareness of the need to plan for retirement, many people have established individual retirement plans such as IRA’s, 401(k)’s, and other pension accounts. It is estimated that over $11-trillion is currently held in retirement accounts. Although the contributions to, and assets in, many kinds of retirement plans are not taxed, withdrawals and distributions-whether to the people who own the plans or their heirs-are. This means that money in a tax-deferred plan that is left to an individual’s heirs can be subject to both income and estate taxes that, in some cases, can erode up to 80% of the funds. In other words, tax-deferred accounts are ticking time bombs when it comes to taxes.

Are there options available to reduce the tax exposure to heirs with regard to retirement plans? Yes, there is if one is inclined to make a charitable gift part of one’s estate plan. Financial planners recommend bequeathing to heirs less-taxable assets - such as cash, stock, and mutual funds - and directing the remainder or unused retirement plan to a charitable organization such as your parish.

Estate gifts or retirement plan assets can either be made outright by a will provision naming a charity as the beneficiary of all or part of a plan or a donor can leave money from a plan to a charitable remainder trust (CRT) that would make annual payments to their heirs for a time before the remainder of the trust’s assets pass to a charity. If a CRT is used, the retirement account will be removed from the estate and thus avoid estate taxes. However, distributions to heirs from this CRT will be subject to income tax. Either strategy will help donors ensure that what remains in their retirement plans at death go to charity and reduce the amount given to the government via taxes.

Under federal law, withdrawals from most IRA’s may begin after the owner has reached the age of 59 1/2 without penalty. However, all distributions are subject to income tax on the amount taken out, even if you give the money immediately to charity. Many owners of IRA’s or other tax-deferred investments mistakenly believe that they can transfer their accounts directly to charities while the are alive and receive both a charitable tax deduction for the gift and avoid the deferred taxes. Unfortunately, this is not true.

The enormous stock-market gains of recent years have increased the retirement-plan assets of many individuals well beyond their ability to spend the accumulated money in their lifetimes. Tax-deferred investments for retirement often represent the largest single asset in a person’s estate. Because the tax advantages can be considerable, this is an opportune time to consider restructuring one’s estate plan to ensure one’s heirs are not unduly burdened by taxes due on an IRA. Talk to your financial planner, tax accountant and attorney about how to pass your tax deferred retirement accounts to your parish, the diocese or other local charitable organization.