At the end of 2024’s first quarter, an estimated 485,000 Americans could count themselves among the so-called “401(k) millionaires,” meaning the balance in their employer-sponsored retirement plans has reached the $1 million level. Thanks in part to stock market rallies during the first part of the year, that’s a larger number than ever before. Many of these 401(k) accounts will be rolled over into IRAs after retirement and the assets will continue to grow.
While legacy giving of any kind is useful, retirement accounts are especially powerful. When your client names a Donor Advised Fund or other fund at the Omaha Community Foundation as the beneficiary of a traditional IRA or qualified employer retirement plan, your client achieves extremely tax-efficient results. Here’s why:
–First, the client achieved tax benefits over time as they contributed money to a traditional IRA or employer-sponsored plan. Because contributions to certain retirement plans are “pre-tax,” your client does not pay income tax on the money used to make the contributions (subject to annual limits).
–Second, assets in IRAs and qualified retirement plans grow tax free inside the plan. In other words, the client is not paying taxes on the income generated by those assets before distributions start in retirement. This allows these accounts to grow rapidly.
–Third, when a client leaves a traditional IRA or qualified plan to an OCF fund upon death, the designated nonprofit does not pay income or estate taxes on the assets. By contrast, if the client were to leave that IRA to their children, those distributions are subject to income tax and potentially estate tax, which can be hefty.
So, if your client is deciding how to distribute of stock and an IRA in an estate plan, donating the IRA to the Omaha Community Foundation and intends to leave one to children and the other to the community, leaving the stock to their children is often the more tax savvy option. Remember, the client’s stock owned outside of an IRA will “step-up in basis” when the client dies, which means the children won’t pay capital gains taxes on the pre-death appreciation of that asset when they sell it.
Speaking of savvy IRA giving techniques, a client who is 70½ or older can make tax-efficient gifts directly from an IRA to a nonprofit – including a fund at the Omaha Community Foundation – of up to $105,000 per year. This is known as a Qualified Charitable Distribution.
We are always happy to work with you to ensure your clients are maximizing their assets to fulfill their charitable giving goals, both during their lives and through legacy giving. We look forward to the conversation!