Tax Tips: Leave your stock to your family and your IRA to charity

To say that the total dollar amount in Americans' retirement accounts is massive would be an understatement. Accounting for 30% of all household financial assets, at the end of 2022 total retirement assets in the United States topped more than $33 trillion dollars, including assets in IRAs, defined contribution plans such as 401(k)s and 457 plans, pension plans, and annuities. IRAs topped the charts at $11.5 trillion – the most assets of any category.

The large balances in traditional IRA accounts (not to be confused with Roth IRAs) are partially due to the fact that many taxpayers have rolled over – tax-free – assets from their employer-sponsored qualified retirement plans to IRAs after retiring or changing jobs. 

If you have one or more traditional IRAs, you're probably familiar with the basics: 

An IRA can have multiple beneficiaries following your death, and you can designate a dollar amount or percentage of assets.

You can change your IRA beneficiaries as often as you like, and beneficiaries can differ across your multiple IRA accounts. 

If a beneficiary dies before you do, and you don't change the beneficiary designation, the assets will be proportionately reallocated to the remaining beneficiaries when you die.

Here's an additional point that is often overlooked: Designating your fund at the community foundation as the beneficiary of all or a portion of your IRAs is extremely tax advantageous. If you intend to leave money to charity when you die, chances are that this technique is absolutely the best option if you own other assets, such as stock or real estate, to leave to your family members or other heirs.

Why is it so beneficial to leave your IRA to charity and other assets to your family?

First, IRAs are included in your estate for federal estate tax purposes when you die. The current exemptions are set at such high levels right now that they do not affect as many taxpayers as they used to, but for many families, estate taxes are still an issue. If you leave your IRA to charity, estate taxes do not apply to that balance.
Don't forget the power of Qualified Charitable Distributions! A QCD allows a taxpayer age 70 ½ or older to make a direct transfer of up to $100,000* annually from an IRA to a qualifying charity. While a donor-advised fund is not considered to be a qualifying charity, the community foundation offers other types of funds that can accept QCDs. For example, designated funds and field-of-interest funds held at the community foundation are ideal recipients of QCD transfers.

Second, the bulk of the balance in an IRA (sometimes the entire amount) is counted as income when IRA withdrawals are taken by your estate or your heirs. If a charity receives your IRA, the charity will not pay these income taxes.
  Until the law changed a few years ago, if you were named as the beneficiary of a parent's IRA, for example, you could count on a tax-savvy method of withdrawals called the "stretch IRA." With the passage of the SECURE Act, the recipient of a parent's IRA now needs to withdraw the entire inherited IRA account within a 10-year period as calculated under the law.

Third, highly appreciated stock and other non-retirement assets you own outside of your qualified retirement plans when you die get a "step up" in basis, meaning that your beneficiaries who receive and then sell the assets won't pay capital gains tax on the appreciation that occurred before you died. And inherited, non-retirement assets are not included in the beneficiary's income for tax purposes.  

The bottom line here is that if you are choosing between stock and an IRA to leave one to your children and the other to charity, leaving the IRA to charity and the stock to your children is a no-brainer.

*Beginning in 2024, the annual limit for QCDs will be indexed for inflation. The 2024 limit is $105,000.

Please contact Laura Lederer if you have questions about how you can use your IRAs to support your favorite charitable causes. We're always available to answer your questions about philanthropy or to schedule a personal consultation – all at no cost.

This content is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.