Qualified Retirement Accounts – 401(k) and 403(b) plans, IRAs, Keoghs, and others – will be the major source of income after retirement for many people. Contributions to these plans are often tax-free and usually grow tax-free as well, frequently making them the largest single asset by the time one retires. Indeed, these accounts comprise around one-fourth of the assets of professionals as a group.
However, assets in retirement accounts are heavily taxed at the death of the owner. Funds withdrawn from these plans must usually pay income tax, and accounts held by large estates may owe estate tax as well. For accounts left to anyone other than a spouse, these combined taxes can easily approach 70%. No other asset is so heavily taxed.
Retirement plans are less valuable in the hands of heirs than they are in the hands of charitable institutions like Christ School. Retirement plans designated for Christ School save income and estate taxes. These tax savings will pay for most of the gift.
Here is an example:
Mr. Green, Class of 1948, owns at his death a 401(k) worth $600,000. He leaves the retirement plan to his children, and designates appreciated stock also worth $600,000 to the school.
Because of his estate’s size, the retirement plan is subject to estate tax at the 40% rate.
Add the income tax, and his retirement plan could undergo taxation of up to 70%, as follows:
$600,000 Retirement Plan total balance
- $180,000 Income tax at 30% of total balance
- $168,000 Estate tax at 40% of $420,000
=$252,000 Remaining in the account for Mr. Green's children after combined taxation
Less than half of Mr. Green’s retirement plan ends up with his children, where he wanted it originally to go.
Instead, a better result for everyone:
In lieu of leaving the 401(k) plan to his children, Mr. Green designates the retirement plan balance to the school. As a charitable contribution, the retirement plan escapes both income and estate taxation. This arrangement also benefits his children, who inherit the $600,000 stock portfolio under these favorable terms:
- free of taxation on any capital gain in the stock at their father’s death, since the basis in the stock is “stepped up” to its fair market value at the date of his death, and
- protected from any federal estate tax by the currently applicable estate tax credit.
To designate part or all of a retirement plan for the school, take these simple steps.
1. Contact your plan administrator, by obtaining the name and address from your employer or from your own records.
2. On the beneficiary designation form, list Christ School for whatever share of the balance you desire.
Please note your designation in your own records and inform the Advancement Office at email@example.com or 828-684-6232, ext. 145. They will gratefully enroll you in The David Page Harris Society, the school’s way of honoring those who include the school in their long-range planning. While Christ School would like to list your name in its publications among the members of the Society, it will keep any details of your plans for the school secure and confidential.
This website presents general information only and should not construed as legal financial, accounting, or other professional advice. Please seek professional assistance to determine how any giving approach discussed here might impact your situation.