MSU Extension: Who Should Be Your Individual Retirement Account Beneficiary…Your Family or a Favorite Non-profit?

This is part of a monthly series of articles on estate and legacy planning. The authors are Kaleena Miller, Madison-Jefferson County Extension Agent, kaleena.miller1@montana.edu, and Marsha Goetting, MSU Extension Family Economics Specialist, marsha.goetting@montana.edu.

Do you have a traditional IRA? If you started an IRA when they were created back in 1974, you may have named your spouse and/or your children as the beneficiaries. This made sense because your spouse could roll over the IRA into their IRA. The adult children could draw the amounts based on their life expectancy, hence the name of the “stretch IRA.” For example, if the age of your beneficiary was 30, they were able to withdraw the minimum distribution for 55 years. However, because Secure Act 2 has changed the withdrawal rules for an IRA beneficiary, you may want to reconsider your plan.

Now, if you name your adult children as the beneficiaries, they must use a new 10-year rule to deplete the account. Instead of being able to stretch the inherited IRA withdrawals over a lifetime, the beneficiaries must draw down the account by the end of the 10th year following the deceased’s passing. In addition, any amount they withdraw from a traditional IRA is subject to ordinary income taxes.

The Federal Reserve reported that the average IRA balance for ages 65 through 74 is $426,070. That means the adult child must withdraw $42,607 each year for ten years. The amount of the IRA withdrawal income would be on top of their earnings. State ($2,514) and federal income taxes ($9,374) were paid on the withdrawal.

Instead of “losing” $11,888 for taxes, why not consider leaving the IRA to your favorite charity? Since charities are exempt from income tax, they can receive the entire IRA and avoid payment of any state or federal income tax. For example, if your IRA balance was $426,070 and you named your favorite nonprofit the beneficiary, the non-profit will receive $426,070. Then, you can leave other assets to your adult children or grandchildren.

Another idea is to use your IRA while you are alive to make an IRA charitable rollover gift. This is called a qualified charitable distribution (QCD). An additional benefit for IRA owners who are age 73 or older is that a QCD may fulfill part or all of the required minimum distribution (RMD) for the year the withdrawal is made, 2024.

Traditional IRA owners should understand how to make a QCD, what information is required to report a QCD on a tax return, and the needed acknowledgment from the nonprofit.

First, a traditional IRA owner contacts the IRA trustee to start the process for a QCD. While distributions from a traditional IRA are normally taxable, the QCD payouts are tax-free if paid directly to a qualified nonprofit. An electronic payment or a check to the IRA owner does not qualify as a QCD. The owner must be 70½ or older, and the 2024 limit is $105,000. If spouses are both over age 70½ and have separate IRA accounts, then the $105,000 per person limit may allow a couple to distribute up to $210,000 per year to charity.

Second, your QCD must be reported on your 2024 federal income tax return. You should receive an IRS Form 1099-R from your IRA trustee with the traditional IRA distribution listed. You must report the IRA distribution on IRS Form 1040.

Third, while your QCD is not deductible as a charitable contribution, you must obtain a written QCD acknowledgment from the nonprofit before filing your return. This acknowledgment should include the date and amount of the QCD and say that the donor has received “no goods or services in exchange for the gift.” You should keep the acknowledgment with your other 2024 tax records.

The IRS has additional information at https://www.irs.gov/charities-non-profits/private- foundations/qualifying-distributions-in-general. For those who do not have computer access, copies are available from the Madison-Jefferson County Extension office at 287-3282.