Gifts of Retirement Plan Assets

Few individuals realize that at the highest marginal rates, income and gift or estate taxes can consume approximately sixty-five percent of qualified retirement plans and IRAs. That means that after years of sometimes painful accumulation, one's heirs may enjoy only thirty-five percent of his or her retirement plan assets. Since these assets are subject to both transfer taxes without a step up in basis at date of death and income taxes at ordinary income tax rates, retirement plans may be ideal vehicles to fund testamentary charitable gifts. In these cases, testamentary transfers of other assets that carry a smaller, if any, income tax burden may better protect the donor's family.

Lifetime transfers of retirement plan assets may be attractive if thoughtfully planned. Under present law, it is generally not possible to do a tax-free transfer (rollover) from a qualified retirement plan or IRA to a charitable remainder trusts or as an outright gift to charity without having to include the distribution in the donor's taxable income. While the donor will receive a charitable income and gift tax deduction for the amount passed to charity, the deduction may not fully offset the income recognition in the year of the gift.

The Pension Protection Act of 2006 (PPA) did, however, provide a narrow opportunity for lifetime distributions of up to $100,000 annually from traditional or Roth IRAs directly to qualifying charitable organizations without requiring income recognition by the plan participant. These favorable provisions were limited to distributions from IRAs only and did not include charitable distributions from pension, profit-sharing, section 401(k), section 403(b), SEP, or SIMPLE plans. Regrettably, these provisions were limited to distributions made in 2006 and 2007, and only for plan participants who have reached age 70-1/2 by the date of the gift. These provisions were not renewed by Congress for years after 2007, but may be reconsidered as part of comprehensive tax reform in 2009.

Gifts of retirement plan assets require careful planning since these accounts may be substantially eroded by minimum distribution requirements or other lifetime needs of the plan participant.

©2008 Ronnie C. McClure, PhD, CPA