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Financial Planning Tip October

October 2022

Are you planning to leave money to charity in your estate? If so, a little strategic planning can make sure that more money goes to charity and less to the tax man.

The best way to leave money to charity is with a traditional IRA. The money in a traditional IRA has not been taxed. It’s allowed to grow tax free until you take it out after retirement age. If you leave it to your heirs, they will have to pay the taxes on it. However, if you leave it to charity, the organization will get the money tax-free. As Laura Sanders point out in her Wall Street Journal article on the topic, this is an “income-tax trifecta.”[1] There is no tax on contributions, no tax on the appreciation, and no tax after death. That’s a rare occurrence indeed.

Assets in other accounts, like taxable accounts and Roth IRAs, don’t incur federal taxes for your heirs unless you have a very large estate. A traditional IRA, however, will be taxable for your heirs. They will have to empty it, generally within 10 years, and pay ordinary income tax rates on the whole thing. A charity would pay no tax on a donation from a traditional IRA. So it makes sense to concentrate charitable donations in traditional IRAs. That means more of your money goes to your heirs and your charities, and less to the IRS.

Another advantage is the ease of changing beneficiaries in your IRA. Changing a will or trust involves both time and legal expense, whereas changing your IRA beneficiaries is as simple as filling out a form.

If you would like add charities to your IRA beneficiaries, let us know. It’s a great way to make sure more of your money goes where you want it to.



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