Changes made by the recently passed SECURE Act may or may not have an effect on your retirement tax planning, but should certainly be reviewed in the context of your current or future planning for individual heirs, such as children and other family members.
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A gift of retirement plan assets can be a surprisingly easy way to reduce potentially very high taxes and provide support to Hartford Hospital.
A gift of retirement plan assets could be right for you if:
- You have an IRA or qualified retirement plan, such as a 401(k) or 403(b).
- You do not expect to use all of your retirement plan assets during your lifetime.
- You have other assets, such as securities and real estate that you want to pass to heirs.
- You may want to provide payments to loved ones after you are gone.
- You would like to make a gift by bequest to the Hospital.
Required Minimum Distributions (RMD) are determined by the IRS and for those born after July 1st, 1949, must be withdrawn (subject to ordinary income tax rates) in the year you turn 72. Those born before June 30, 1949 are subject to the old rules and must begin to take their RMD starting in 2020. Failure to meet these required minimum withdrawals will result in substantial tax penalties.
In the chart below, you can see how a 70 year old with an IRA valued at $1.5 million would be only two years away from being required to withdraw as much as $2.5 million as taxable RMD income over the next 20 years or more, resulting in hundreds of thousands of dollars in taxes owed by the accountholder along the way:
Option 1: Make a tax-free gift with an IRA charitable rollover (aka Qualified Charitable Distribution, or “QCD”)
You can make an immediate tax-free gift each year after the year in which you turn 70-1/2 by transferring up to $100,000 directly from your traditional IRA to the Hospital (other qualified retirement plans such as 401(k)s and 403(b)s are not eligible). You must be at least 70 ½ years old to take advantage of this opportunity.
The benefits of an IRA charitable rollover gift include:
- Avoiding income tax on IRA withdrawals.
- Supporting the important work of the Hospital with a tax-free gift.
- Satisfying the required minimum distribution (RMD) after age 72.
The chart below shows the same IRA account donating its RMD amount each year—up to the maximum of $100,000 per year—using QCD transfers to charity. No income is realized on QCD amounts, so no income tax needs to be paid on those QCD withdrawals, and the amounts attributable to RMD are satisfied after age 72:
Option 2: Designate remaining retirement plan assets for Hartford Hospital.
Another attractive option is to designate the Hospital as the recipient of some or all of what’s left in your IRA, 401(k), 403(b), or other qualified plan when it ends. While often simpler than drafting a will or revocable trust, care should be taken to avoid unintended and potentially adverse consequences when selecting your beneficiaries. Additional information may be found on this site at plannedgiving.hartfordhospital.org/gift-planning-vehicles/naming-us-your-assets.
Please seek professional tax advice to ensure your planning objectives can be carried out effectively.
In addition to having the satisfaction of making a significant gift to the Hospital, your benefits include:
- Giving your individual beneficiaries, other than your spouse, less of a tax burden when receiving their beneficiary distributions under the SECURE Act.
- Making a gift completely free of federal and state taxes that can total 37% or more, if your estate exceeds the applicable exemption.
- Removing a sizeable asset from the probate process.
Option 3: Designate remaining retirement plan assets for a life income plan.
Alternatively, you can designate that some or all of the assets remaining when your IRA, 401(k), 403(b), or other qualified plan ends be used to fund a gift arrangement that will make payments to family members or other loved ones for the rest of their lives. When the gift arrangement ends, what is left will go to Hartford Hospital.
In addition to having the satisfaction of making a significant gift to the Hospital, your benefits include:
- Potentially saving federal and state taxes.
- Preserving non-retirement plan assets for family.
- Providing payments to family or other loved ones for life.