Leaving Your 401K To Charity

An important part of putting together an IRA, 401(k), 403(b) or other qualified plan is appointing a beneficiary. On a positive note, this helps ensure that upon your death, any remaining account balance will transfer directly to your heirs without going through probate. On the negative side, your heirs might lose up to 80% of the account’s balance to income and estate taxes, both federal and state.

On other assets, heirs pay less or even no tax. Stocks the owner holds outside a qualified account and passes to his heirs receive a step-up in cost basis to the value on the date of death, so heirs pay no capital gains tax on the stocks’ appreciation during the original owner’s lifetime.

By leaving qualified plan balances to nonprofits and more tax-advantaged assets to your heirs, you could get more of your wealth where you intended. Nonprofits, being tax exempt, pay no income tax on the money they receive. Proper estate planning could assist you with avoiding a few potential mistakes and figure out which method to use for spreading your assets.

You can pick from a number of methods for acquiring funds from your qualified plan account to a nonprofit. For certain types of accounts – including money purchase pension, profit sharing, 401k, stock bonus, employee stock ownership plans or defined benefit or annuity plans – your spouse has to sign a waiver relinquishing his or her right to the account. This rule doesn’t apply to IRAs.

You can also name multiple beneficiaries with a certain percentage of the account for each, or list the charity as the contingency beneficiary. This means that if all other beneficiaries are deceased, the account passes to the charity.

Designating a charity as a beneficiary on your qualified plan account can help protect your estate from state and federal income tax and estate tax. You should consult an estate attorney, tax expert and financial advisor to make sure your estate plan gets your assets exactly where you wanted.

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