• The amount of his gift is not taxed, thereby reducing his income taxes.
• His tax bracket is not affected.
• Additional tax is not incurred on his Social Security income.
• The amounts given count toward minimum required distributions.
• No estate or gift taxes will be due on the amounts donated and he does not have to itemize deductions to benefit from giving in this manner.
To qualify for benefits of making gifts from a traditional or Roth IRA, it is important that funds from your IRA not be withdrawn by you, but instead be distributed directly to one or more qualified charities. If you have check-writing privileges associated with your IRA account, the IRS considers a check to be a transfer directly to charity. Gifts may not be made to donor-advised funds, private foundations or supporting organizations. Check with your IRA administrator or other advisors for more information
Other retirement plan gift opportunities
If you are over the age of 59½, and can make withdrawals from your traditional IRA or other tax-favored retirement plan without triggering an early withdrawal penalty, you may wish to make withdrawals from retirement plans in amounts sufficient to fund all or a portion of your charitable gifts. Those over the age of 70½ who would like to make gifts in excess of amounts that can be given tax free, or would like to give from a retirement plan other than a traditional or Roth IRA may also wish to make their gifts in this way.
Although you will be required to report the income on your tax return, when you itemize your deductions, you are allowed a corresponding charitable deduction for your cash gifts up to 50% of your adjusted gross income (AGI).
If you are able to deduct the full amount of the gift/withdrawal, this can amount to a "wash" for federal tax purposes and ensure these funds will, in effect, never be subject to gift, income, or estate taxes.
You should seek assistance from your accountant or other advisor when determining the optimum amount to give from retirement plan accounts under federal and state tax laws.
Avoid Double Taxation
You also may want to consider including charitable gifts as part of your plans for the future distribution of any balances remaining in your retirement plans at the end of your lifetime.
Because they are included as part of one's estate at death, the assets in tax-favored retirement plans such as an IRA, 401(k), SEP, and similar plans can be subject to federal and/or state estate taxes.
In addition, when heirs receive the balance of retirement plans after payment of estate taxes of up to 40% or more, income tax will also be due—up to 39.6% or more—depending on state income taxes and other factors. Thus, the combination of income and estate taxes that could eventually be levied on retirement accounts may, in some cases, amount to the bulk of an account's value.
Rather than allowing retirement assets to be reduced by a combination of estate and income taxes, you can direct that such assets be used to fund charitable gifts from your estate. This can actually result in more assets being received by loved ones than if retirement assets were left to family and charitable gifts were made from other funds.