Tax Consequences of Donating Inherited IRAs
Original post by Allison Westbrook of Demand Media
Donations from inherited IRAs to charity yield tax benefits, rather than consequences.The U.S. tax code imposes tax constraints on estate beneficiaries. Depending on the overall amount of an IRA and the estate it’s a part of, total taxes on some IRAs could reach 60 percent or more. By donating money in an IRA to charity, the IRA beneficiary can lower her overall estate and income tax burden.
A person who inherits a traditional IRA must pay income taxes on withdrawals from the account, because original contributions to a traditional IRA are tax-free. When an heir makes a withdrawal from an inherited IRA, the IRS considers it income in respect of a decedent, because the original IRA owner paid no taxes on the money prior to death.
The Estate Tax
The estate tax is a federal taxation of inherited funds paid in addition to federal income tax. Congress determines the amount inheritance subject to the estate tax each year. For example, no one paid estate taxes for inherited funds in 2010, but anyone who receives an inheritance of more than $1 million in 2011 will pay an estate tax of 45 percent of the amount that exceeds $1 million. The IRS subjects all property and assets to the estate tax – including IRAs.
According to the IRS, heirs may use the amount of charitable contributions from an IRA as a deduction on federal income taxes. Additionally, the federal government exempts contributions from an IRA to charity from the estate tax. Whether the original IRA-holder wills part or all of his IRA funds to a charitable beneficiary, or an heir donates her portion of an IRA to a charity, the IRS will not impose an income or estate tax on any portion of the donation.
To take advantage of charitable IRA contribution tax deductions, an heir must never make a withdrawal of funds from the IRA. Instead, the IRA should go directly to the charity, after which time the charity may make withdrawals. If an heir withdraws the money and then donates it to charity, the IRS will tax the withdrawal as a distribution subject to the estate tax and income tax.
Donations from an inherited Roth IRA to a charity offer fewer tax benefits than donations from a traditional IRA. Qualified withdrawals from a Roth IRA are not subject to income tax, regardless of whether the original account-holder or an heir makes the withdrawals. However, the IRS will impose an estate tax on Roth IRA funds, so a contribution to charity from a Roth IRA could eliminate or lower the amount of estate tax an heir owes.
- "Kiplinger"; FAQs on the Death of the Estate Tax; Kevin McCormally; April 2010
- Fidelity Charitable Services: Clients Should Plan to Donate Retirement Assets
About the Author
Allison Westbrook is an experienced writer of three years with a passion for creating relevant articles for a wide readership. She attended Kilgore College and majored in English. Allison's articles have appeared on such websites as eHow and Trails.com. Her reflective writing angles deliver focused and consistent content.