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.

If you are charitably-inclined and holding large sums of money in your 401(k) and IRA, learn the benefits of deploying these accounts toward achieving your philanthropic goals. Indeed, although a charitable bequest of any type of property can help achieve your estate planning and legacy goals, retirement accounts are especially powerful. When you name a public charity as the beneficiary of a traditional IRA or qualified employer retirement plan, you achieve extremely tax-efficient results. Here’s why:

• You achieved tax benefits over time as you contributed money to a traditional IRA or to an employer-sponsored plan. That’s because contributions to certain retirement plans are what the IRS considers “pre-tax”; you do not pay income tax on the money used to make those contributions (subject to annual limits).

• Assets in IRAs and qualified retirement plans grow tax free inside the plan. In other words, you are not paying taxes on the income generated by those assets before distributions start in retirement years. This allows these accounts to grow rapidly.

• When you leave a traditional IRA or qualified plan to a public charity, the charity does not pay income taxes (or estate taxes) on those assets. By contrast, if you were to name children as beneficiaries of an IRA, for example, those IRA distributions to the children are subject to income tax (and potentially estate tax), and that tax can be hefty given the tax treatment of inherited IRAs.

So, if you are considering how to dispose of stock and an IRA in an estate plan and intend to leave one to children and the other to charity, leaving the IRA to charity and the stock to children is a no-brainer. Remember, the stock owned outside of an IRA gets the “step-up in basis” when you die, which means that the children won’t pay capital gains taxes on the pre-death appreciation of that asset when they sell it.

Speaking of savvy giving techniques using IRAs, those 70 ½ or older can make tax-efficient gifts directly from an IRA to a qualified charity (including certain types of funds at the Waco Foundation), up to $105,000 per year! This is known as a “Qualified Charitable Distribution.”

We are happy to work with you to ensure that you and your clients are maximizing assets to fulfill charitable giving goals, both during your lifetime and through legacy gifts. Contact Planned Giving Director Jamie Goble to discuss utilizing your IRA to make charitable donations to the charities in our community!