Defined contribution retirement plans such as IRAs and 401(k)s have today become the most predominant form of retirement planning for the majority of people. These investment accounts have largely replaced the defined benefit plans – pensions – that are still with us today, but mostly for government employees.
Every retired holder of an IRA or 401(k) account has experienced the reality that income taxes on withdrawals from your retirement plan are larger than you had imagined. This is because when you and/or your employer contributed to your IRA or 401(k) over your working life, the income tax on those earnings was deferred. Those taxes do not come due until you withdraw funds during your retirement years.
Should you name one or more of your heirs (except your spouse) as beneficiaries of a retirement account in your will, current tax law allows them to withdraw funds on a schedule subject to IRS regulation (and pay the taxes due on them) for a period of up to 10 years after you are gone.
So, in general for an estate below the federal taxable threshold ($11.58 million for individuals, or $23.16 million for a married couple), it would be more tax-advantageous to leave assets other than retirement accounts to your heirs.
By bequeathing the remainder of your retirement accounts to your favorite charity, your estate can claim the charitable deduction for the full value of the account, and the charity receives it with no federal tax obligation.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisor(s) before engaging in any transaction.