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Donating from Retirement Accounts – Educating Donors on Their Options

Financially savvy individuals are always looking for ways to maximize the impact of their retirement assets while also reducing their tax burden as much as possible. One of the most effective ways to do this is to plan for testamentary charitable gifts from various retirement vehicles, such as IRAs or 401(k) plans. Nonprofits and charitable organizations can leverage this opportunity to educate and nurture these donors with the goal of capturing some or all of those donations when the time comes.

One of the biggest challenges people face is determining how their estates will be handled after their death. Improper planning can result in a tremendous tax burden, causing unnecessary stress and the loss of funds that could have been better allocated if set up properly. By scheduling testamentary gifts, donors can dramatically reduce their taxes while also tailoring their estate plans to support the causes they care about and create a lasting legacy.

The good news is that one doesn’t need to wait until after they have passed on to start donating via their retirement accounts. In fact, individuals who are aged 70 ½, and therefore required to make annual withdrawals from their retirement accounts (RMDs), can avoid paying some or all of the income tax on those withdrawals if they are donated directly to a qualifying charity. Furthermore, people who meet the age requirement are allowed to transfer up to $100,000 per year, and couples filing jointly can donate a maximum of $200,000 annually.

The Importance of Education

The number of individuals who take advantage of these tax breaks is surprisingly low because potential donors are unaware that these options even exist. Additionally, many people don’t realize just how much of their estate will ultimately be allocated to taxes. For example, let’ssay that upon a person’s death, $1 million of their estate is income in respect of a decedent, like a retirement plan.

  • $400,000 will automatically go to estate taxes

  • Of the remaining $600,000, descendants will have to pay income taxes on their inheritance

  • At a tax bracket of 35%, this would leave just $400,000 to be divvied up

Now, let’s say the deceased allocated the entire amount of their IRD to charity. In this case, there would be zero taxes assessed, which would mean the charity would receive the entire $1 million donation.

When it comes to deciding how to best handle retirement funds, donating assets to charity can be both financially wise as well as greatly rewarding. Utilizing the power of data analysis can help organizations identify which potential donors are age-eligible now, or will be in the near future. Educating this audience on their options can improve the odds of securing those big donations, either when it comes time for RMDs or upon the donor’s death.

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