Why You Should Make a Charity the Heir to Your IRA

A charity doesn't have to pay taxes on the gift. And if you leave your heirs taxable investments instead, they probably won’t owe taxes on them, either.

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Question: Can I make a charity the beneficiary of my IRA? Is there a benefit to doing that rather than leaving other money to the charity in my will?

Answer: Yes, you can make a charity the beneficiary of your IRA. And if you leave other investments that are part of your estate to your heirs, they will get a nice gift from the IRS, too.

When your heirs inherit a traditional IRA, they have to pay income taxes when they withdraw the money (except for withdrawals of non-deductible contributions). See How to Minimize Taxes When You Inherit an IRA for more information about the tax rules. If the beneficiary is a charity, however, it doesn’t have to pay taxes on withdrawals. (An inherited Roth IRA generally isn’t taxable to anyone.)

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If you make the charity the beneficiary of a traditional IRA, you can leave your heirs money from taxable accounts instead. “You can substitute a different asset for your heirs and give the charity the asset that would otherwise be taxable,” says Jane Wilton, general counsel for the New York Community Trust, the community foundation for New York City. Your heirs usually avoid taxes because the tax basis for investments that aren’t held in an IRA or other retirement-savings account is stepped up when you die, and no taxes are due on gains from stocks or mutual funds that occurred during your lifetime.

Ask your IRA administrator about special rules for designating the nonprofit as the heir to your IRA. You don’t have to give your whole IRA to charity; you can generally specify how much of the IRA you’d like to leave to charity and which portion to leave to other heirs. Or you can split your IRA into two separate accounts and, for example, make your spouse the sole beneficiary of one account and leave the other account to the charity.

Let a family member or attorney know your wishes, so that the executor of your estate can let the nonprofit know that it is the beneficiary of the IRA, says Maura Cassidy, vice president of retirement products for Fidelity. It can also help to talk with the charity ahead of time about how the money will be used; you generally don’t have the opportunity to include details on the IRA beneficiary forms about how you’d like the charity to use the money, as you can when you make a bequest in your will, says Wilton.

With some charities and community foundations, such as the New York Community Trust, you can set up a fund while you’re still alive to support the causes you’d like to focus on and make that fund the beneficiary of your IRA. “If they have a specific purpose in mind, we can create a fund that serves the purpose they want to carry out,” says Wilton.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.