STRETCHING YOUR IRA WITH A CHARITABLE TRUST: A STRATEGY TO BE USED POST-SECURE ACT

By Sinclair Prosser Gasior

You have spent decades working and building up your retirement account. You are trying to delay the time in which you are required to start taking distributions from that account. You are then trying to take the smallest amount of money out of that retirement account based on your life expectancy.  You do this to try and pay less in income tax.  You view your retirement account as a long-term safety net. 

Naturally, you would want this same preservation mindset for the beneficiaries of your retirement account. However, under the SECURE Act and SECURE 2.0, most non-spouse beneficiaries must fully withdraw that retirement account within 10 years. 

To illustrate the tax implications, let’s look at an example. Say you leave your retirement account to your adult son that is worth $500,000. Let’s assume that they take distributions of the retirement account over 10 years:

• Annual Withdrawal of 500,000 ÷ 10 = $50,000/year cash distribution to son.
• Annual Taxes (Assuming 35% tax bracket) $50,000 × 35% = $17,500/year in taxes owed (don’t forget about estimated tax payments if applicable). 
• Net to Beneficiary (per year) $32,500/year

Wouldn’t it be great if your beneficiaries could better preserve the IRA that you left them, drawing from it gradually over a longer period. That’s where a Charitable Remainder Trust can help by accomplishing the following:

• Restoring a similar stretch-like-treatment by allowing annual distributions to beneficiaries over a period longer than 10 years. Prior to the SECURE Act, beneficiaries of retirement accounts were able to stretch distributions over their life expectancy, which was more advantageous from an income tax standpoint. The longer the life expectancy, the less in income tax you pay each year. The Charitable Remainder Trust puts beneficiaries in a position that is similar to how things were before the SECURE Act. 
• Income Tax Deferral: Instead of taking distributions out over 10 years, and paying $17,500/year in taxes (see above example), beneficiaries can take distributions over a longer period of time, and thus pay less in income tax each year. 
• Providing a portion for charity: Being charitably inclined is important for this plan to be successful. The portion of the retirement account that goes to charity may result in an Estate Tax charitable deduction. 

Using a charitable trust for your retirement account is a powerful way to help plan from an income tax standpoint. This type of trust requires careful drafting to ensure, amongst other things that: 1) there is the appropriate amount left in the trust for charity, and 2) there is the proper payout of the assets to the beneficiary. Contact Sinclair Prosser Gasior at (410)578-4818 or spgasior.com to learn more.