For many of us, 401(k)s, IRAs and retirement plans constitute the bulk of our net worth, aside from our homes. Will these hard-earned dollars provide more comfort for the future of our loved ones? Maybe not.
Reality Check
A recent national research study, however, shows that more than half of Americans aged 30 and older are largely unfamiliar with the way in which taxes can eat up the value of their retirement accounts when they name a loved one as beneficiary.
FACT: Income taxes can consume up to 35 percent of retirement plan funds. Future estate taxes may also apply.*
While the majority of people will pay less than 35 percent, anyone who inherits retirement plan funds will be subject to income tax on all withdrawals. Although there are ways in which spouses and some individual beneficiaries can defer taxes on these assets, they, too, are subject to income tax when they make withdrawals.
A Win-Win Alternative
An estate planner can help you structure the inheritance so family members pay the least taxes. Experts sometimes advise putting a charitable component into the plan because qualified charitable organizations, like Jewish Community Foundation of Los Angeles, receive donations tax-free. Unlike family members, we receive the full value of your retirement plan assets-none is lost to taxes. Plus you can rest easy knowing you can change your mind at any time up until your death.
Here are two options:
- If you're determined to avoid taxes altogether on your retirement plan assets, you could leave them to the Jewish Community Foundation of Los Angeles and build an inheritance for your loved ones from other assets, such as life insurance or property.
- If much of your nest egg is tied up in a retirement plan, you may have little else to leave to family. In that instance, a more reasonable alternative may be to designate a percentage of your retirement plan accounts to us, thus taking greater control over how the funds in these accounts will be used while still providing for family and friends.
*Currently, federal estate taxes are repealed for all deaths that occur in the calendar year 2010. In 2011, estate taxes are scheduled to be reinstated for estates worth more than $1 million at rates up to 55 percent. Congress, however, is likely to address reinstating estate taxes before 2011. What the final legislation will look like and when it might become effective is unknown at this point.
New research reveals how your loved ones really feel about sharing a piece of their inheritance with a nonprofit.
In a scientific study, researchers posed the following question to the 31 percent of Americans aged 30+ who expect to or have already received an inheritance:
"Suppose someone other than your spouse were to leave you an inheritance. If they had also decided a nonprofit organization would get a percentage, something like 5 to 10 percent, in all honesty, do you think you would wish they had left 100 percent to individuals rather than to organizations, or do you think a gift to an organization is a reasonable choice?"
Here's how they responded:
72%: A gift to an organization is a reasonable choice
17%: Not sure
11%: Wish 100 percent would go to individuals
Contact Us
We would be happy to assist you in your charitable planning. Contact our Development Office at 323-761-8704 or development@jewishfoundationla.org to learn more about options that may work for you.
This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the editor and contributors are not engaged in rendering legal, accounting or other professional services. Therefore, the contents should not be applied as legal or financial advice.