Life and Death Planning for Retirement Benefits

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Chapter 7: Charitable Giving 379
compare Therefore, generally retirement plan death benefits paid to a pooled income
fund will be subject to income tax in the year received by the fund to the same extent they would
be taxable to an individual beneficiary. Accordingly a pooled income fund is not an attractive
choice as beneficiary of traditional retirement benefits.
Nor is it an optimal choice as beneficiary for a Roth IRA, because it cannot qualify as a
see-through trust; see discussion at end of
7.6 Lifetime Gifts of Retirement Benefits
This discusses lifetime (as opposed to at-death) charitable giving options for
individuals who have money in IRAs and other retirement plans. Most of the considerations
discussed here apply to both living participants and beneficiaries (with respect to inherited benefits
they hold).
7.6.01 Lifetime gifts from distributions
A client who has more money in his retirement plan than he expects to need may wish to
give some of it to charity. Generally, the only way he can do this is to first withdraw funds from
the plan and then give the funds to the charity. For a temporary exception to this general rule, see
“Qualified Charitable Distributions” .
Withdrawing funds or other assets from a retirement plan generally causes the value of the
withdrawn property to be included in the recipient’s income. If the recipient then donates the
withdrawn amounts to charity in the same year that he took the distribution, the income tax
charitable deduction theoretically should eliminate the tax on the distribution. Unfortunately the
following obstacles often prevent the income tax charitable deduction from wiping out the tax cost
of the distribution:
A. Percent-of-income limit. The income tax deduction for charitable contributions is limited
to a certain percentage (30% or 50%, depending on the type of property given and the type
of recipient charity) of the individual’s gross income If the individual’s donations
exceed the deduction limit, the excess can be carried forward for a limited number of years.
B. Deduction-reduction for high-income taxpayers. Charitable deductions are an itemized
deduction, subject to the “reduction of itemized deductions” that applies to high-income
taxpayers in years before 2009 or after 2012. The amount of the reduction is a
percentage of the donor’s AGI—so the potential reduction is increased by the plan
distribution, which increases AGI. The phaseout begins at $250,000 of AGI for single
taxpayers ($300,000 for married filing jointly).
C. PEP for high-income taxpayers. The personal exemption deduction is phased out under
a different Code section and schedule, again beginning at $250,000 of AGI for
single taxpayers ($300,000 for married filing jointly). A retirement plan distribution, by
increasing AGI, may cause loss of some or all of the taxpayer’s personal exemption. The
charitable contribution does not offset this.
D. Deduction decreases taxable income but not AGI. Because the distribution is included
in the individual’s gross income, it may increase his taxes in other indirect ways that are