Monthly Retirement Tips


A Tax-Smart Way to Leave Money to Charities and Your Family

“In this world, nothing is certain except death and taxes.”

Death may be a certainty, but some taxes actually aren’t, depending on the circumstances.

The tax implications of your charitable contributions and what you leave to your heirs might not be a top concern of yours. However, it is an important thing to think about. What are some important questions to ask before finalizing what you want to be done with your money after you are gone? For example, is there a way to, in the case of some accounts, decrease the amount of it that goes to the IRS, and increase how much goes to your family? That’s a tax strategy that, generally, most people can get behind.

However, you need to understand how taxes are assessed for each recipient.

What You Should Know

As an example: Under most circumstances, traditional IRAs are going to be fully taxable to your heirs. Furthermore, the Secure Act made it mandatory that inherited IRA accounts are fully disbursed within ten years of the IRA owner’s death. Spouses are an exception to this rule.

This means that all income taxes on the inherited IRA must be paid by the time ten years have passed. Inherited Roth IRAs offer better terms. This is because they can continue to grow for ten years after your death, and then can be withdrawn tax-free. Things like after-tax money or life insurance, for the most part, are not subject to income taxes.  As you can see, tax implications are different based on which asset is being passed to which recipient.

Although, here’s some good news: None of this applies if the recipient is a tax-exempt charity.

Essentially, no IRS-recognized tax-exempt charity ever has to pay taxes on the money it receives, period. Traditional IRAs, Roth IRA, after-tax dollars, or life insurance are all the same as far as they’re concerned. Your heirs, on the other hand, will confront different tax implications depending on the type of asset.

According to the Wall Street Journal, however, the best funds to leave to charity are that of a traditional IRA asset. You see, traditional IRAs have been growing over the last decade. Most of that growth is due to asset appreciation and rollovers from workplace plans, such as 401(k)s. With the demise of pensions, traditional IRAs are now the largest financial account many people have.

If you’d like to learn more about the impact of taxes on the money you leave behind after you die, particularly in traditional IRA accounts, read the Wall Street Journal article discussing the topic.

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