Jim’s October Tip: Enjoying the Change of Seasons

October 08, 2021

A Giving Strategies post by Jim Friedman

The start of fall means appreciating beautiful colors as the leaves change from the lush green of spring to the brilliant red, orange and gold hues of autumn. But it also warns us that a new season is not far behind where we will not have the warmth and sustenance we have been enjoying. We are reminded that we need to make sure we have saved up enough to get us through the long bleak winter days. This brings to mind the need to plan for our retirement someday or make the best of these times if we are already well into those years.

Most of us have been encouraged to save for our retirement and we are often reminded by our financial advisors to make the maximum contributions to our IRAs or adjust our contributions to our employer’s 401(k) or similar plan. But just as it is important to take the proper steps to ensure your financial security during your retirement years, it is just as essential that you plan for the ultimate distribution of your retirement assets, both during your lifetime and beyond.

Retirement plans are unique in financial planning. The federal government encourages retirement savings by deferring paying any income taxes on the money contributed to these plans. They also allow you to defer paying taxes on the income and growth these funds earn. The key word however is defer. This money will eventually be taxed as if it is ordinary income when distributed either to you during you lifetime or to your heirs at your death.

Once retirement assets pass from you or your spouse to any other beneficiary (such as children or grandchildren), the tax consequences can be severe. The assets are subject to federal and state ordinary income taxes, which can be as high as 40 percent. Additionally, depending on the amount of lifetime exemption your estate has used up, there may be substantial additional gift and estate taxes on the retirement assets. When you add up all the taxes, your children may receive less than 25 percent of your IRA assets—the rest going to taxes. Thinking about leaving it to grandchildren? That may be even worse because the government does not want to miss a level of taxation so they levy a Generation Skipping Transfer Tax at a hefty rate. Someone once said you should only leave these retirement assets to your grandchildren if you don’t like them very much.

Because of the potential for mammoth tax implications for retirement assets, they are an excellent choice for making charitable gifts. Rather than leave gifts to your favorite charitable organizations out of your will, instead make your charitable donations out of your retirement assets. You may name a sole charity or designate multiple organizations as the beneficiary along with your spouse. The good news is that 100 percent of the amount passing to charity will be available to be put to good use because no taxes will be deducted. By getting it out of your taxable estate, more of your other assets can be passed to your heirs under the lifetime exemption without taxes. Perhaps best of all, designating retirement assets for charitable purposes is simple and offers complete flexibility. You simply ask the custodian of your retirement plan for a “Change of Beneficiary” form and fill in the percentage of your eventual assets you want to go to each beneficiary, including your spouse and charities. No attorney or other professional advisor fees are necessary. And importantly, you can always change your mind without any penalty any time during your lifetime if you decide you want different designations.

The alternative to leaving retirement assets to your direct heirs is to leave them your stocks, bonds and real estate. Why? Because there is a good chance that they will not pay taxes since their cost basis will be the value on the date of your passing—not your original cost. Therefore if they sell the inherited assets in a reasonable time period, there may be little or no capital gain taxes associated.

If retirement assets are likely to comprise a sizable portion of your estate, then there are several important considerations for you to discuss with your professional advisors. By using retirement assets to make your permanent charitable gifts, you not only maximize the value of these assets, you also may substantially reduce the “cost” of these gifts to your family since they would otherwise receive only a small portion of the assets.

So as you contemplate the inevitable coming of winter, make it a pleasurable experience by making sure, just like squirrels who have put away stashes of nuts, you have planned for better control over your assets in the future.

You can reach Jim Friedman, Director, Planned Giving and Endowments, at 513-985-1524 or jfriedman@jfedcin.org. You can reach the Federation’s Create Your Jewish Legacy team here and the Create Your Jewish Legacy website here.

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