Earmarking retirement accounts for (other) good causes

There is no way, the old saying goes, to take it with you, but charities, museums, and other nonprofit institutions have developed a growing number of ways to take it from you.

Donors can always give away assets to their favorite institution now, or later through a bequest or trust.

Another popular donation method: gift annuities. These are basically investment accounts created by nonprofits that guarantee donors a specific return during their lives in exchange for a lump-sum donation. The institution keeps the money after they pass on.

But a new tack that has been gaining momentum is contributing all or some of a retirement account, such as a 401(k) or an IRA, to a nonprofit as a bequest.

With this strategy, individuals place a portion of their pre-tax retirement money into a separate account, reducing the amount of taxable income they will have to claim, and over time that money also can grow tax-free.

"More clients are bequeathing their retirement accounts to charities," says Gary Schatsky, an attorney and chairman of the Buffalo Grove, Ill.-based National Association of Personal Financial Advisors. "It makes sense from an estate-planning viewpoint, since the money in a retirement account is otherwise subject to estate and income taxes by a beneficiary."

"And it's a logical place for charities to look for future revenues," he adds.

Indeed, nonprofits are getting savvy about this potential source of funding.

"Retirement accounts make up a great part of peoples' wealth and will do so increasingly in the future," says Judith Hozore, deputy chief development officer for planned giving at New York's Metropolitan Museum of Art. "The problem is that once you take money out of that account, you have to pay a tax on it. It doesn't matter if you use that money to take a cruise or donate to a charity - you still have to pay a tax. The Internal Revenue Service wants people to use that money for retirement, not just to bank it and create legacies."

Ms. Hozore says the tax picture changes if, after the individual dies, the money is not left to an heir (who would have to pay a tax on it) but to a tax-free charitable institution.

"That maximizes the benefit everyone receives," she says, explaining that the individual received the tax advantages of building the retirement account, the heirs are spared paying a tax, and the charitable institution is helped by the gift.

While a surviving spouse is able to receive a retirement account tax-free, he or she would still have to pay taxes on any amount withdrawn from it. Alternatively, the person who originated the account could pass it directly to a charity, as long as his or her spouse agrees in writing.

The use of retirement funds as a form of charitable giving is "a relatively new concept, which a growing number of museums are looking into," says Jerry Kappel, director of development at the Washington-based American Association of Museums.

He notes that members of Congress have discussed changing the law governing retirement plans to permit individuals to donate money to charitable institutions from these accounts tax-free while they are still alive.

In the meantime, prospective donors are being advised by nonprofits not to withdraw funds from their retirement accounts, but to save them for use as a charitable gift.

Because the idea is so new, there is no evidence of how successful the appeal has been at present. "We've heard from a fair number of people that they are considering doing this," Ms. Hozore says. "We'll find out when they die if they've done it."

(c) Copyright 2000. The Christian Science Publishing Society

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