At the end of 2024’s first quarter, an estimated 485,000 Americans could count themselves among the so-called “401(k) millionaires,” meaning the balance in their employer-sponsored retirement plans has reached the $1 million level. Many of these 401(k) accounts will be rolled over into IRAs after retirement and the assets will continue to grow.
With so many of your charitably-inclined clients holding large sums of money in 401(k)s and IRAs, now is an important time for a brief refresher course on the benefits of deploying these accounts toward achieving clients’ philanthropic goals. Indeed, although a charitable bequest of any type of property can help achieve a client’s estate planning and legacy goals, retirement accounts are especially powerful. When your client names a public charity, such as a donor-advised or other fund at the Community Foundation, as the beneficiary of a traditional IRA or qualified employer retirement plan, your client achieves extremely tax-efficient results.
HERE’S WHY:
First, the client achieved tax benefits over time as they contributed money to a traditional IRA or to an employer-sponsored plan. That’s because contributions to certain retirement plans are what the IRS considers “pre-tax”; your client does not pay income tax on the money used to make those contributions (subject to annual limits).
Second, assets in IRAs and qualified retirement plans grow tax free inside the plan. In other words, the client is not paying taxes on the income generated by those assets before distributions start in retirement years. This allows these accounts to grow rapidly.
Third, when a client leaves a traditional IRA or qualified plan to a fund at the Community Foundation or another charity upon death, the charity does not pay income taxes (or estate taxes) on those assets. By contrast, if the client were to name children as beneficiaries of an IRA, for example, those IRA distributions to the children are subject to income tax (and potentially estate tax), which can be hefty given the tax treatment of inherited IRAs.
So, if your client is deciding how to dispose of stock and an IRA in an estate plan and intends to leave one to children and the other to charity, leaving the IRA to charity and the stock to children is a no-brainer. Remember, the client’s stock owned outside of an IRA gets the “step-up in basis” when the client dies, which means that the children won’t pay capital gains taxes on the pre-death appreciation of that asset when they sell it. Speaking of savvy giving techniques using IRAs, a client who is 70 ½ or older can make tax-efficient gifts directly from an IRA to a qualified charity (including certain types of funds at the community foundation), up to $105,000 per year! This is known as a “Qualified Charitable Distribution.”
The Community Foundation is always happy to work with you to ensure that your clients are maximizing their assets to fulfill their charitable giving goals, both during their lives and through legacy gifts. We look forward to the conversation!
Ultimately, the right approach is different for each family. However, what family philanthropy programs have in common is that they help younger family members learn both independence (how to be self-sufficient and self-supporting) and interdependence (how to be emotionally, economically, ecologically, and morally responsible to other family members). With such an overwhelmingly positive impact, family philanthropy should be a top consideration for every family beginning a journey toward healthy governance.
DID YOU KNOW?
The members of the Community Foundation’s philanthropic advising team belong to a peer network of Certified Advisors through 21/64. Established in 2002, 21/64 has evolved from a program with the Andrea & Charles Bronfman Philanthropies into an independent 501c3 nonprofit practice providing multigenerational advising, facilitation and training for next generation engagement.
They specialize in serving families with funds, foundations or other family enterprises as well as wealth and philanthropy advisors – so that multiple generations can work, give and serve together more effectively.
Our involvement with 21/64 gives us access to speakers, trainings, online workshops, a peer learning community and a custom suite of tools designed to help philanthropic individuals, families and organizations align their giving and impact with their values.
A FEW EXAMPLES OF THESE TOOLS INCLUDE:
- Picture Your Legacy®
- Motivational Values™
- Money Messages©2018 21/64, Inc.
If you’d like to learn more about 21/64, please visit www.2164.net or contact us directly to discuss how we can help facilitate these tools with your clients.
