Planned Giving 101: The Retirement Plan Beneficiary Gift

I love the retirement plan beneficiary gift.

Signature with Fountain Pen_Retirement Plan BeneficiaryI’ve even written about it before.

Why do I love it?

  • It’s super-easy.  No lawyers required.
  • It costs you nothing.
  • You can change your mind at any time.
  • It’s a tax-wise way to give.

What is the Retirement Plan Beneficiary Gift?

When you own a retirement plan – whether it’s an employer-sponsored plan like a 401(k) or 403(b), or any of the many flavors of IRA (traditional, Roth, SIMPLE, SEP), you name one or more beneficiaries to inherit those assets when you pass away.

(Side note: it’s generally not advisable to name a trust as the beneficiary of a retirement plan for tax reasons.  Talk with your CPA or financial planner about it.)

Instead of, or in addition to, naming people as beneficiaries, you can designate one or more charities.

Why is this such a good thing (beyond the generous gesture of giving to charity)?

When individuals receive retirement assets as an inheritance, they are taxed on those assets when they take distributions (except for Roths, which are always tax-free).

When charities receive retirement assets, no income taxes are due.  Charities receive 100% of the retirement account and pay $0 taxes.

Charities would receive the money free of estate tax as well if the donor’s estate was large enough to be otherwise subject to estate tax.

Thus, to the extent you have other non-retirement assets in your estate, those are better assets from a tax perspective to leave to heirs while leaving the tax-deferred assets to charity.

Tips for Naming Charity as Retirement Plan Beneficiary

  • Ask the retirement plan custodian or administrator for the proper beneficiary designation form.
  • Use the charity’s full legal name.  This avoids confusion when there are similar-sounding organizations.
  • Use the charity’s Tax ID Number (TIN) where the beneficiary’s Social Security number is supposed to go. Check the organization web site or call to find out what it is.
  • Decide whether to name charities as primary or contingent beneficiaries, or both.  Charities would prefer primary, naturally.  (While you’re at it, consider reviewing all your beneficiaries.)
  • Consider letting the charity know what you have done.  Most charities offer attractive benefits to those who have disclosed having made a gift like this.

Easy, free, and satisfying.  There’s nothing like the retirement plan beneficiary gift.

Comments or feedback?  Contact me on Twitter @juanros

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