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Retirement Tip of the Month

A Tax-Smart Way to Leave Money to Charities and Your Family

As the famous idiom goes, “In this world, nothing is certain except death and taxes.”

And, while death may be a certainty, some taxes actually might not be.

The tax implications of your charitable contributions and what you leave to your heirs might not be a concern you have thought about a lot. However, it is important to think about it. What are some important questions to ask yourself regarding what you want to be done with your money after you are gone?

For example, could there be a way to, in the case of some accounts, decrease how much goes to the IRS, and increase how much goes to your family? This is a tax strategy that, in general, most people can get behind. However, in order to do this, you need to understand how taxes are assessed for each recipient.

What You Should Know

For example: Under most circumstances, traditional IRAs are going to be fully taxable to your heirs. Furthermore, the Secure Act made it mandatory that inherited IRA accounts are fully disbursed within ten years of the owner’s death. Spouses are an exception to this rule.

What this means is, that all income taxes on the inherited IRA must be paid after ten years. Inherited Roth IRAs offer better terms than this. They can continue to grow for ten years after your death, and then can be withdrawn tax-free. After-tax money or life insurance, meanwhile, aren’t subject to income taxes. As you can see, tax implications differ based on which asset is being passed to which recipient.

However, there’s some good news: None of this applies if the recipient is a tax-exempt charity. Essentially, an IRS-recognized, tax-exempt charity never has to pay taxes on the money it receives, ever. Traditional IRAs, Roth IRAs, after-tax money, and life insurance all apply to this.

Additionally, according to a recent article from the Wall Street Journal, the best funds to leave to charity are that of a traditional IRA. You see, traditional IRAs have been growing over the past decade or so. Most of that growth is due to asset appreciation and rollovers from workplace plans. With the demise of pensions, traditional IRAs are now the largest financial account many people have. Want to know exactly why leaving the money in your IRA to a charity organization is such a smart play? Read the aforementioned Wall Street Journal Article on the topic. 

Additionally, if you’d like to learn more about lessening the burden of taxes on yourself and your beneficiaries, we may be able to help.

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