Houston Estate Planning and Elder Law Attorney Blog
If you roll the money over to an IRA first, you can donate funds from your 401(k) Required Minimum Distribution tax free. Be very careful to follow the rules, so that you don’t create a tax or penalty problem.
First, let’s define the RMD (Required Minimum Distributions). This is the least amount of money that someone who owns a retirement plan is required to withdraw every year, starting the year that the individual turns 70½, or, if they retire later, the year when they retire.
However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs have to start once the account holder is age 70 ½—even if she’s not retired. The rules of what can and cannot be done with retirement plans are very strict, so you may need help from a professional.
A recent Kiplinger article, “Making Charitable Donations From Your Retirement Accounts,” explains that retirement plan participants and IRA owners—including owners of SEP IRAs and SIMPLE IRAs—must take the correct amount of RMDs on time every year from their accounts, or face big penalties.
What about when a plan owner dies? What are the rules for distributions to their beneficiaries? There are different RMD rules that apply. The entire amount of the owner’s benefit usually must be distributed to the beneficiary who is an individual either:
- Within five years of the owner’s death; or
- Over the life of the beneficiary, starting no later than one year following the owner’s death.
Roth IRAs don’t require withdrawals, until after the owner’s death. The tax-free transfer of an RMD to charity only applies to IRAs. However, there’s a way to give money from your 401(k) to charity tax-free: you need to roll over money from your 401(k) to an IRA and then donate it to the charity.
To do this, you’d have to take your RMD from the 401(k) for this year before you can do the rollover. You can then roll over 401(k) dollars to the IRA for future charitable transfers. If you do this by the end of the year, you'll be able to begin moving some of the money to charity in 2018, which may fulfill some or all of the RMD from your IRA.
If you are 70½ and older and charitably inclined, you are permitted to donate up to $100,000 of your IRA to a charity. There are some real benefits to doing this. First, the contribution counts towards your RMD, but it’s not included in your adjusted gross income. That might make you eligible for tax breaks that are tied to your AGI, and, depending on your situation, could reduce or even eliminate tax on your Social Security benefits. Check with an experienced estate planning attorney to make sure that this aligns with your estate and tax plan.
Reference: Kiplinger (September 22, 2017) “Making Charitable Donations From Your Retirement Accounts”