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Using your retirement plan for charity?

December 15, 2008

Retirement plans are a tricky problem for income and estate tax planning. If you die with a retirement plan balance, it can be subject to estate tax, and your beneficiaries also have to pay income tax. These two taxes help explain the popularity of the provision that allows taxpayers to use their IRAs to make charitable gifts.

Taxpayers who will reach age 70 1/2 by year-end can have their IRA trustees contribute up to $100,000 per year to charities without the donation going through the tax return. By avoiding both the income tax and the estate tax, it provides an efficient way to fund a charitable pledge. To qualify, the IRA trustee must transfer the donation directly to the charity. While the donation doesn't appear on the IRA owner's return, there is also no deduction. But by keeping the IRA out of "above the line" income, it avoids AGI-based deduction phaseouts. It also is a tax-efficient way for non-itemizers to fund charity.

The IRS has more on IRA donations to charity here.

Collect all of our 2008 year-end planning posts!

Tags: year-end tax planning.