Consider Charity When You Have to Take Retirement Funds

Featured Article
November 2014

When retirement funds are distributed too soon or too late, they are usually subject to a penalty tax. Notwithstanding the penalty, some individuals make early withdrawals because they need the money. At the other end of the spectrum are those who don’t need the money even when they are required to take it. If you are in that circumstance, your retirement fund may be the best source of your charitable gifts.

Early withdrawal
Distributions before the age of 59½ are subject to a 10 percent penalty tax in addition to being taxed at the participant’s marginal income-tax rate—unless the distribution is for certain allowable purposes such as medical expenses for a disability or qualified educational expenses.

Making early withdrawals despite the penalty became more common after the real estate crash of 2008, when homeowners discovered they had no equity to tap through second mortgages. In 2011, the most recent year with figures available, penalties collected from Americans who withdrew retirement money too soon totaled $5.7 billion.

Other individuals retire during their 60s and begin taking distributions at that time. They need to be as conservative as possible in the withdrawals so that they don’t run out of money.

The upper deadline
The latest date distributions can begin is April 1 following the year the participant attains the age of 70½, except for certain plans where the participant continues working past that age.

The fortunate ones can afford to wait until the mandatory age before beginning withdrawals and then withdraw only the minimum amount required, which at the age of 70 is only 3.65 percent of the account (though that percentage steadily increases with age). These individuals may have ample other investments, and in some cases they are still working.

A good choice for charity
Assuming you will not need all of the money in your retirement plan for living expenses, your retirement fund may be the best source of your charitable gifts. If Congress renews the IRA charitable rollover legislation (first enacted in 2006 and renewed every year through 2013) and you are over the age of 70½, you can authorize your IRA administrator to make a direct transfer from your IRA to our organization and other  charities, and the amount you transfer (up to $100,000) will not be taxed and will count toward your mandatory distribution.

Whether or not you make lifetime charitable gifts from your IRA, you can make end-of-life gifts not only from an IRA but from any defined contribution plan—401(k), 403(b), etc.—simply by naming our organization as a beneficiary of whatever portion that may remain.

Whereas retirement funds (other than a Roth IRA) will be subject to income tax if given to individuals, they escape income tax if given to a charity such as ours. If you have waited as long as possible to start withdrawals and are taking out only the minimum, the chances are that the balance in your fund at the end of your life will be significant.

In fact, that balance could continue to grow until your mid-80s, when the mandatory distribution percentage may be higher than the annual investment return. In that case, leaving a modest percentage to our organization would have minimal impact on your loved ones.

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