Retirement Accounts - IRAs, 401(k), 403(b), TIAA-CREF, and the like - are a major factor in many financial plans. Because they often represent a sizable proportion of one's portfolio, it is natural to think of these assets when considering philanthropy.
When funds are removed from a qualified retirement plan, the owner must pay income tax on the withdrawal. Moreover, if qualified plan assets are included in one's estate, the amount in the plan is effectively taxed twice - once as "income with respect to a decedent" and then again under the estate tax structure. Retirement plan assets thus make a poor vehicle for a person to provide an inheritance to heirs because of the taxes that must be paid on withdrawals during life or on the qualified plan assets contained in one's estate.
Fortunately, both income and estate taxes can be avoided by giving plan assets to charity at death. However, care must be taken to make the charitable organization(s) beneficiary(ies) of the plan directly, rather than allowing the plan assets to be included in one's estate. Since the administration of each plan varies according to the policies written into the plan, it is best to seek advice from your plan's administrator and experienced professional advisors when considering naming charities as beneficiaries of your qualified plan assets.
