Gifts of retirement plan assets
Many Americans hold a significant percentage of their wealth in their retirement plan accounts, such as a 401(k) plan or IRA. The assets in these accounts grow tax-free over time but have significant built-in tax liability. Accordingly, a large percentage of the assets in the accounts will be lost to tax if the account is left to someone other than a spouse upon the account owner’s death; however, using these assets for charitable gifts at death can be advantageous for tax purposes.
Income tax is triggered when the assets are taken out of a retirement account—either when the account owner makes a withdrawal during his or her lifetime, is subject to Required Minimum Distributions (RMDs), or when the account is distributed upon the account owner’s death. Additionally, if there are assets inside the account when the account owner dies, they will be included in the account owner’s estate for estate tax purposes. The income and estate tax liability amounts to a double taxation on the assets in the account.
Currently the combination of federal estate and income taxes on a retirement account can exceed 64 percent. Combined with state death taxes and income taxes the tax liability on the assets could total 80 percent.
For example, if an account owner named her son as the beneficiary of her retirement account that is worth $1,000, after payment of federal and state income and estate tax, he may receive only $300. The federal and state governments would receive 70 percent of the mother’s account.
Contrast this scenario to a situation where the account owner designates the University of Chicago as the beneficiary of her retirement account. The account owner’s estate would receive a charitable deduction for the entire amount of the account, which will leave a larger balance of the estate for the donor’s other intentions. Further, because the University is a tax-exempt charity, it will not have to pay income tax on the distribution and would receive the entire $1,000.
You can name the University as beneficiary of part or all of your account simply by requesting a form from the plan's custodian. If you have already taken steps to name the University as a beneficiary of a retirement account, we encourage you to let us know. All donors who support the University through a planned gift are invited to join the Phoenix Society.
If you would like more information on gifts of retirement accounts, please e-mail us or contact us by phone at 866.241.9802, and consult with your legal and tax advisers for advice on the consequences of your gift.
Please note: Information found on this page is intended to provide general information an is not intended as legal advice nor should be relied upon as such.
Denise Chan Gans
Office of Gift Planning
5235 South Harper Court
Chicago, IL 60615
Contact other gift planning staff.