Retirement Plan Beneficiary Designation

Many Americans have a significant percentage of their wealth in their personal retirement plan accounts, such as a 401(k) plan or an IRA. The assets in these retirement accounts grow tax-free over time but have significant built-in tax liability.

A large percentage of the assets in these accounts will be lost to tax payments if the account is left to someone other than a spouse upon the account owner’s death.  However, using these assets for charitable gifts as a legacy at death can be advantageous for tax purposes.

The Benefits of Donating Retirement Plan Assets

Income tax is triggered when assets are taken out of a retirement account, either when the account owner makes a withdrawal during her or his lifetime which is subject to federally-mandated Required Minimum Distributions (RMDs), or when the account is distributed to beneficiaries upon the death of the account owner.

Also, if there are assets in the account when the account owner dies, they will be included in the account owner’s estate for the purpose of estate tax calculations.  The income and estate tax liability amounts to a double tax on the assets in this account.

Currently the combination of federal estate and income taxes on a retirement account can be in the 60%+ range.  Combined with your state’s potential death taxes and income taxes, the tax liability on the assets could total 80 percent.

How Making a Planned Gift Affects Your Tax Liability

As an example, say an account owner named her son as the beneficiary of her retirement account that is worth $1,000.  After paying federal and state income and estate tax, he may receive only $300.  The federal and state governments would receive 70 percent of the mother’s account.

An alternative scenario to this situation is when the account owner designates Mount Mercy Academy as the beneficiary of her retirement account.  The estate of the  account owner would receive a charitable deduction for the entire amount of the account, leaving a larger balance of the estate for any of the donor’s other intentions.

Additionally, because Mount Mercy is a tax-exempt charity, it will not have to pay income tax on the distribution and would receive the entire $1,000.

Making a Gift of Retirement Plan Assets

You can name Mount Mercy Academy as beneficiary of part or all of your account simply by requesting a form from your plan’s custodian.

Communicating Your Intentions

If you have provided for Mount Mercy Academy in your estate plans but have not previously notified the school of your intentions, please contact the Office of Institutional Advancement at 716-825-8796, ext 324 or institutionaladvancement@mtmercy.org.  Sharing your plans with us allows us to express our gratitude to you during your lifetime, ensures that your wishes will be met, and also assists the school’s long-term planning efforts.

Note: The information on Mount Mercy’s pages on planned giving vehicles is intended to provide general information that we hope will be helpful in your tax, estate, and charitable planning.  It is not intended as legal advice and should not be relied upon as legal advice.  For advice or assistance with your particular situation, you should consult an attorney or other professional adviser.