Tax planning for IRAs

Mr. Kevin M. Crouch, J.D., is a Partner at Meyer & Sayers, LLP. Meyer and Sayers are a boutique firm of estate-planning attorneys in Savannah, Ga. They specialize in wills and trusts, estate planning, probate, fiduciary litigation, taxation, business succession planning, and more.

Tax planning for IRAs
By Mr. Kevin M. Crouch, Partner, Meyer & Sayers, LLP

For years, the go-to estate planning strategy for tax-favored retirement plans was the “stretch IRA.” By using the stretch strategy, Individual Retirement Accounts (IRA) (or other retirement accounts such as a 401(k)) could be passed to non-spouse designated beneficiaries (or see-through trusts for their benefit) and could take advantage of tax-deferred and/or tax-free growth of the assets within the account during the stretch out period. The beneficiary would be allowed to take annual distributions over his or her life expectancy, thereby allowing the assets within the IRA-continued tax-deferred growth over the lifetime of the beneficiary. This tax-deferred growth over the stretch out period could, in many cases, amount to an incredibly advantageous result for the frugal beneficiary.

The SECURE Act, passed in 2019, and SECURE 2.0, passed in 2022, drastically changed the landscape of estate planning relating to tax-favored retirement plans. One main change of the SECURE Act was the elimination of the non-spousal stretch provisions that allowed beneficiaries of IRAs to spread distributions over his or her lifetime.

But with change comes new opportunities. With tax-favored retirement plans no longer accomplishing the estate planning goal they once could, clients have shifted their attention to using their qualified plans as a way to benefit their favorite charities or education institutions. Individuals with Individual Retirement Accounts are currently required to take their Required Minimum Distribution (RMD) each year beginning at age 73. This is taxable income that, in many cases, the individual would rather direct to a better cause.

A Qualified Charitable Distribution (QCD) is a process by which individuals meeting certain requirements can donate up to $108,000 from a traditional IRA directly to a qualified charity. There are certain requirements that must be met for an individual to make a QCD. First and foremost, the individual must be at least 70 ½ years old and have a taxable Individual Retirement Account. As previously discussed, the annual limit is $108,000. The donor has the ability to make one large contribution or several smaller contributions but the annual total from all IRAs must not exceed $108,000.

The funds must also be directly transferred from the IRA custodian to the qualified charity. If the money is withdrawn and then donated, it would not count as a QCD. QCDs are only permitted from traditional, rollover or inherited IRAs. Inactive SEP or inactive SIMPLE IRAs are also permissible accounts to make a QCD. Employer-sponsored plans like 401(k)s will not qualify for a QCD, although these plans can be rolled into an IRA and thus qualify.

Finally, the donations must go to an eligible 501(c)(3) public charity. Schools, such as Benedictine Military School, qualify as a non-profit education institution meeting the requirements for 501(c)(3) tax exempt status.

For clients that a QCD does not make sense, we can coordinate adapting their estate plan around utilizing their qualified retirement accounts to benefit their favorite charities at death. Those with IRAs or other qualified retirement accounts can name a qualifying 501(c)(3) charity as beneficiary of their retirement account which produces great tax benefits. Since most schools like Benedictine qualify as a 501(c)(3), they are tax exempt and can receive 100% of the qualified assets without paying any income taxes. If left to individual heirs, the distributions would be subject to federal (and potentially state) income taxes.

As with any planning, it’s important to discuss your goals and wishes with your professional team – such as your estate-planning attorney, financial advisor, and/or CPA – to determine the best course of action for preserving and passing on your legacy.

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For more information on making a charitable gift to Benedictine Military School, please contact Benedictine Chief Advancement Officer Mr. Tim Nelson at (912) 644-7016 or tim.nelson@bcsav.net.