Can I set up a life income gift using retirement assets?
Yes, but you must pay income tax on the deferred funds you withdraw from your retirement account. In the case of a life income gift, the offsetting income tax deduction will be smaller than in the case of an outright gift.
I have a large IRA and would like to make a gift to Wellesley using this asset. Are there any problems?
Yes. Tax-deferred assets are not directly assignable. That is, you cannot donate them without first withdrawing them and paying income tax on the tax-deferred portion. The good news is that you will receive an income tax deduction for your charitable gift, which will offset at least a portion of the income tax liability.
Why wouldn't I be able to offset the entire tax liability?
You can often offset the entire tax liability. There is, however, a limitation on how large a charitable deduction you can use in a given year, based on your adjusted gross income (AGI) and the type of asset used to fund the gift. (This limitation equals 50 percent of AGI for charitable gifts of cash, 30 percent for gifts of appreciated assets). Thus, the relative sizes of your gift and your AGI determine the amount of the deduction. Any portion of the income tax deduction that cannot be used in the year of your gift can be taken in the next year, up to a total of five additional years, if necessary.
I own some highly appreciated stock that I could use to fund a gift to Wellesley, but I would prefer to use funds from my retirement account. Any suggestions?
You could donate the stock to Wellesley, avoiding all capital gains taxes and receiving a charitable deduction for the full value of the gift. Then you could withdraw funds from your retirement account to replace the donated amount. Any income tax on the withdrawn funds will be partially or totally offset by the savings on capital gains tax and the charitable deduction for your gift.
My largest asset is my IRA and I would like to leave it as a bequest to Wellesley. How can I accomplish this while leaving enough for my children?
It is often best to leave assets other than retirement plan assets to children. This is because these assets are subject to both estate and income taxes. The combination of taxes can take 60-80 percent of the asset. Leaving the retirement funds to Wellesley eliminates both estate and income taxes.
What are some possible planning options in the case above?
One could split the retirement plan asset, leaving part to the children and the remainder to Wellesley (implementing this correctly requires professional assistance.) Estate and income taxes, however, may be due on the portion left to the children.
Another option would involve setting up a testamentary charitable remainder trust or annuity, providing income to the children and the remainder to Wellesley (the College will set up and administer the trust or annuity at no cost). This choice will produce some tax consequences, but any estate tax liability will be lessened since Wellesley receives the remainder of the trust or annuity, and any income taxes on income to the children will be spread out over many years.
There are other options involving the use of life insurance as a replacement for the donated asset.
If I convert my IRA to a life annuity, can I still use this asset to make a gift to Wellesley?
Once you have annuitized, you no longer control the asset. Any gift would have to come from the income produced by the annuity.
If I never annuitize my IRA, then can I allow it to grow indefinitely and produce a huge estate to leave to my children and/or Wellesley?
The IRS believes that retirement vehicles should fund retirement and not be used as savings accounts. Therefore, you are required to begin withdrawing funds from your IRA when you reach 70 1/2. There are various options based on life expectancy, and failure to comply results in a 50 percent tax on the amount you were required to withdraw in a given year.
If I do not need the income, what is the best way to convert these funds into a gift for Wellesley?
When you reach 70 1/2, you could select one of the minimum distribution options (MDOs) for your IRA in order to avoid the 50 percent tax, pay the income tax on the withdrawn amount, and donate the remainder to Wellesley.
Prepared by Howard J. Wilcox
Professor of Mathematics and Planned Giving Officer
For additional information about retirement planning, contact the Office of Planned Giving at email@example.com or 800.253.8916.