Retirement savings are usually the most tax-efficient asset you can leave to charity. Money in a traditional IRA or 401(k) has never been taxed, so whoever inherits it owes income tax as they draw it down — unless the beneficiary is a charity, which owes none. The gift is made on the account’s beneficiary form rather than in your will.
Why Retirement Money Is the Best Asset to Leave a Charity
Almost everything else you own gets a fresh start at death. A brokerage account, a house, farmland: the cost basis is generally reset to the value on the date of death, so decades of growth can reach your family with the built-in gain wiped out.
A traditional retirement account does not work that way. It is income in respect of a decedent — income you earned, deferred, and never paid tax on. There is no step-up. Every dollar a child or a niece withdraws from an inherited traditional IRA is ordinary income on their return, taxed at their rate, quite possibly in the years they are earning most.
A charity is exempt from that tax. The same account left to a 501(c)(3) arrives whole. Nothing else in an ordinary estate has that large a gap between what a person receives and what a charity receives, which is why advisers reach for the IRA first when a client says they want to leave something to charity.
A Roth account is the mirror image. Tax on it has already been paid, so it passes to heirs free of income tax, and it is the last thing to give away. If you intend to benefit both family and charity, the traditional account is the piece to point at the charity and the Roth is the piece to keep for the people.
The Beneficiary Form, Not the Will
Retirement accounts pass by contract. The beneficiary designation on file with the custodian decides who gets the money and overrides whatever your will says. A clause in a will directing an IRA to charity does not move the IRA. It creates an argument.
Three practical consequences follow.
- The gift is made by completing the custodian’s beneficiary form, and it takes effect as soon as the form is accepted.
- The account passes outside probate, so the charity is not waiting for the estate to settle.
- A stale form is the most common failure of all. An ex-spouse named twenty years ago and never removed is still the beneficiary.
If the account is an employer plan rather than an IRA, expect one more step. A married participant in a 401(k) generally cannot name anyone other than the spouse without the spouse’s written, witnessed consent, and plan rules vary in ways IRA rules do not. Read the plan’s own form instead of assuming.
Which Asset Should Go to Whom
| Asset | Usually best left to | Why |
|---|---|---|
| Traditional IRA or 401(k) | Charity | The income tax has never been paid. A charity owes none; an individual owes it at their own rate. |
| Roth IRA | Family | Already taxed, so it reaches heirs free of income tax. |
| Taxable brokerage account | Family | Cost basis is generally stepped up at death, so the built-in gain can disappear. |
| A home, land or a family business | Family | The same step-up treatment, and usually the assets a family actually wants to keep. |
Dividing an estate along those lines often costs the family nothing at all and delivers more to the charity than a cash bequest of the same face value would. Bequests, trusts and the rest of the will-based routes are covered in leaving money to charity in your will.
How to Name a Charity as Beneficiary
- Decide on a percentage rather than a dollar figure. Balances move. A percentage keeps the split you intended whether the account doubles or halves before it is needed.
- Get the organization’s exact legal name and its EIN in writing, from the organization itself. Misnamed charities are a routine cause of contested designations, and a name copied off a web page is not good enough for a custodian.
- Ask the custodian or plan administrator for the beneficiary designation form. Most allow several beneficiaries with percentage splits, and most now accept the change online.
- Say where the money is meant to go. If the charity holds more than one fund, name the fund in writing and confirm with the charity that it can honor the restriction.
- Submit the form and keep the confirmation. A signed form in a drawer is not a designation.
- Tell the charity. Organizations cannot claim money they have never heard of, and naming one in silence is how a gift goes missing for years.
- Re-read the form after every marriage, divorce, death and account move. Rolling an old 401(k) into a new IRA does not carry the beneficiary designation across; the new custodian starts blank.
What It Means for the People You Also Name
Most non-spouse individuals who inherit a retirement account now have to empty it within roughly ten years rather than stretching withdrawals across a lifetime. There are exceptions — a surviving spouse, a minor child of the account owner and certain others are treated differently — and the rules have been amended more than once since they were introduced, so confirm the current position with a preparer rather than relying on an older article. The effect is to compress the tax bill into a decade, which is one more reason the traditional account is the piece to give away.
One technical trap is worth naming. Mixing a charity and individuals as beneficiaries of the same account can complicate the payout rules for the human beneficiaries. The usual fixes are to split the account before death, or to divide the interests by the deadline the regulations allow. That is a question for whoever drafts the designation, not something to solve from the form itself.
Giving From an IRA While You Are Alive
If you are 70 and a half or older and want the gift to happen now rather than after your death, a qualified charitable distribution — also called an IRA charitable rollover — sends money straight from the IRA to the charity without it ever entering your taxable income, and the guide to qualified charitable distributions for Kansas retirees covers who qualifies, what the current annual cap is and how to run one.
The two are not alternatives. Plenty of donors do both: a distribution each year while they are living, and a beneficiary designation for whatever is left.
Naming a Miami County Fund on the Form
Miami County Community Foundation is a 501(c)(3) community foundation in Paola, established in 2007 and tax exempt since November 2007 in public IRS filings. The legal name to put on a beneficiary form is Miami County Community Foundation. Ask the Foundation for the EIN in writing rather than lifting one off a third-party directory.
The Foundation has not published a procedure for retirement-plan beneficiary gifts, so the first call is a real conversation and not a formality. Say what the account is, roughly what share you have in mind, and which part of the county you want it to reach. The Foundation can tell you which fund the money should go to and how the designation ought to be worded so the restriction holds.
What the money can do is already defined. An endowed fund opens at $10,000, stays permanently invested and cannot fall below the amount put in, and a 5 percent spending policy makes roughly $500 a year available from a $10,000 fund. An expendable fund opens at $1,000 and can be spent to zero, at which point it closes. The fee is 2 percent in total, a 1 percent administrative fee plus a 1 percent community support fee, and setting a fund up takes seven to ten business days.
The funds already running show what that pays for: the $3,000 D.O. Smith Memorial Scholarship for a Miami County student holding a CNA certification or a nursing school place, the $1,000 Steve Pepoon Memorial Scholarship at Paola, the $750 Johanna Vickrey Nursing Scholarship at Louisburg, and grant programs paying for suicide-prevention work in schools across Miami and Linn County. Most awards fall between $500 and $3,000. The funds open to online giving are listed under our funds, and the giving methods, including gifts by will and trust, are on the ways to give page.
A retirement-plan gift usually sits inside a wider plan, so it is worth reading how planned giving works in Miami County first. Two related decisions follow from it: whether the gift should be restricted to one purpose or left unrestricted, and whether a life insurance policy would do the same job more simply.
Before You Sign the Form
Get the legal name and EIN from the charity. Choose a percentage, not a dollar amount. Use the custodian’s own form rather than a letter. Tell the charity what you have done. Then have your attorney or tax adviser read the designation alongside the rest of your estate plan, because none of this is tax advice and a beneficiary form interacts with everything else you have signed.
If the money is meant for Miami County, contact the Foundation on (913) 404-7287 or at info@micocf.org and ask which fund fits what you have in mind.
