According to Charity Navigator, total charitable giving in 2017 increased to $410 billion, which represents a 5.2% increase in giving from 2016. Indeed, charitable giving has increased year over year every year since 1977 (except for 1987, 2008, and 2009; all of which coincided with worldwide financial crises). Perhaps contrary to public opinion, the increase in donating to charitable causes shows that our society has become more generous, not less.

As attorneys, we are often confronted with ways in which we can either assist with or leverage clients' charitable giving. While there is a veritable slew of charitable giving techniques that a client may deploy to enjoy tax savings from their giving, a simpler solution exists in the form of the humble IRA -- an asset that is often a significant portion of the average individual or family's financial portfolio.

As most people are aware, saving through their retirement plans have some significant upsides, such as:

Deferral of income tax;
Creditor protection; and
Potential employer-sponsored matching.

However, the downsides can be harsh, including:

10% penalty for withdrawal before age 59 1⁄2 (with some hardship exceptions);
Mandatory required minimum distributions (“RMD's) must begin at age 70 1⁄2;

"Ordinary," not capital gain, income tax treatment upon distributions (i.e., all proceeds from any IRA are taxed no differently than a typical paycheck, with the effective tax rate based upon your tax bracket).

Given the significant tax downsides, what many charitably-inclined clients may not realize is that after reaching age 70 1⁄2, it is possible for a client to donate their RMD's along with additional amounts up to $100,000 of pre-tax retirement plans (i.e., 401k, Traditional IRA, Rollover IRA, 403(b), etc.) assets to charity per year without realizing any income tax consequences. Indeed, from a tax efficiency perspective for the average individual or family who is currently giving charitable gifts, donating a portion of their retirement plan assets, rather than assets that have already been taxed in the past, may indeed result in superior tax outcome.

To illustrate, consider the following example:

Carl and June are animal lovers, and they have consistently made monthly or annual donations to their favorite animal rescue shelter. Rather than using “post-tax” dollars that they earned and invested during their career, they choose instead to donate the RMD's from their 401k.
Assuming that Carl and June are in the 28% tax bracket in the year of the gift, after tax considerations are taken into account, they are actually able to give their favorite charity a 28% larger gift due to the fact that: (i) they never paid tax when the dollars were transferred to the 401k as it was "pre-tax" money, and; (ii) the distributions from the 401k was also never taxed upon the transfer to charity. Inversely, if they had instead given "post-tax" dollars from their savings account, they would have paid tax upon the receipt of their annual RMD's.

Moreover, in the context of a charitable gift upon either Carl or June's death, giving retirement assets to satisfy pledges to charity rather than to their heirs prevents the beneficiaries from also inheriting the tax consequences of inheriting the retirement plan asset; namely, having to pay "ordinary" income tax upon the distribution of the funds from the plan. In other words, gifts of retirement plans to charity is a win-win for you, your beneficiaries, and your favorite charity.

With thoughtful consideration and appropriate tax counsel, our charitably inclined clients can help their favorite causes while they and their chosen beneficiaries also enjoy considerable tax benefits.