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Charitable Giving: Naming a Beneficiary to an IRA

National Preparedness Month | Layman & Nichols LawAn Individual Retirement Account (also known as an IRA) allows an individual to save for retirement with the advantage of the growth of the account being tax-deferred.  There are three types of Individual Retirement Accounts: Traditional IRA, Roth IRA, and Inherited IRA.

When choosing to name a beneficiary to an IRA, you may first think of naming your spouse, children, or a close friend. However, these are not the only beneficiaries that can benefit from an IRA.  Another option for an IRA beneficiary is to choose a charity, several charities, or a combination of a charity and a loved one.  Since a charity is tax exempt, when it receives the IRA proceeds it will not pay income tax on the gift. However, unlike most other assets, an IRA does not receive a step-up in tax basis upon the death of the IRA owner. Therefore, if a spouse, children, or other person receives those proceeds, that will be ordinary income and they will have to pay Federal and State income tax.

If you are charitably minded, and you were going to make a gift to a charity at your death, or even prior, it is best to use funds from an IRA to reduce your family’s overall tax implications.

When designating a charity as an IRA beneficiary, do not feel compelled to donate your account solely for tax reasons.  Take the time to research charities of interest and be certain that you truly want to designate that particular charity.

If you have any questions about designating a charity as your IRA beneficiary, please contact us anytime at Layman &Nichols, P.C.

 

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