Castle Estate Planning: IRA 401K Maximize
A Simple Solution to Maximize that IRA or 401(k)
in Your Estate Plan
By: Bruce Alan Danford
When a person saves money in a 401(K) plan or a regular IRA the money is not taxed until the money is withdrawn from the plan. Wouldn’t it be nice if when you die you could give your favorite charity the amount leftover in your 401(K) or IRA without anyone ever having had to pay tax on it? Your favorite charity would receive the full dollar and not the amount left over after paying that income tax which had never been paid on it? Well now you can!
In enacting provisions in the Internal Revenue Code regarding the deductibility of charitable contributions, Congress recognized charities take on some tasks that otherwise the government would have to perform. The House Committee on Ways and Means in one of its few statements regarding charitable tax deductions stated in 1938:
The exemption from taxation of money or property devoted to charitable or other purposes is based upon the theory that the Government is compensated for the loss of revenues by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare. HR Rep. No. 1860, 75th Cong., 3d Sess. (1938)
Because of that, the tax laws allow a deduction for money given to charity and does not tax the money a charity receives. The tax laws allow charitable deductions for income tax under Internal Revenue Code (IRC) §170, for estate tax under IRC §2055, and for gift tax under IRC §2522. Some of the laws and regulations work against each other intentionally to exclude a contribution deduction from being taken for two or more of the taxes at the same time. Recent changes now permit a person to designate as a beneficiary of their 401(K) or IRA a charity and no one has to pay the income tax as the money comes out of the plan! For example:
Bob has $10,000 in an IRA and $10,000 in cash. When he dies Bob wishes to leave as much as he can to both his son and to his favorite charity. He could leave the $10,000 in cash to the charity and change his beneficiary designation on his IRA to his son. His son would have to pay income tax on the IRA amount as he received it and would wind up with much less than the $10,000. The charity would receive the entire $10,000 cash. A better solution would be: Bob could leave the $10,000 in cash to his son and change his beneficiary designation on his IRA to the charity. His son would receive the entire $10,000 without any tax implications and the charity would receive the entire $10,000 also without any tax implications.
Isn’t it nice that helping your favorite charity can also help the government, and help your family or other loved ones! Please, as with any legal or financial action, consult your attorney or accountant first.